Measuring Sustainability and CSR: From Reporting to Decision-Making 3031269586, 9783031269585

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Ethical Economy. Studies in Economic Ethics and Philosophy

Slobodan Kacanski Johannes Kabderian Dreyer Kristian J. Sund   Editors

Measuring Sustainability and CSR: From Reporting to Decision-Making

Ethical Economy Studies in Economic Ethics and Philosophy Volume 64

Series Editors Alexander Brink, Chair of Business Ethics, University of Bayreuth, Bayreuth, Germany Jacob Dahl Rendtorff, Department of Social Sciences and Business, Roskilde University, Roskilde, Denmark Editorial Board Members John Boatright, Loyola University, Chicago, IL, USA George Brenkert, Business Ethics Institute, Maguire Hall 209B, Georgetown University, Georgetown, Washington, DC, USA Allan K. K. Chan, Lee Shau Kee School of Business & Administration, The Open University of Hong Kong, Homantin, Hong Kong Christopher Cowton, University of Huddersfield, Huddersfield, UK Richard T. de George, University of Kansas, Lawrence, KS, USA Jon Elster, Columbia University, New York, USA Amitai Etzioni, George Washington University, Washington, DC, USA Ingo Pies, Lehrstuhl für Wirtschaftsethik, Martin-Luther-Universität Halle-Wittenberg, Halle (Saale), Sachsen-Anhalt, Germany Michaela Haase, Marketing, Freie Universität Berlin, Berlin, Germany Carlos Hoevel, Facultad de Ciencias Economicas, Universidad Catolica Argentina,  Buenos Aires, Argentina Yuichi Shionoya, Hitotsubashi University, Kunitachi, Tokyo, Japan Philippe Van Parijs, Chaire Hoover d’Ethique Economique, Universite Catholique de Louvain, Louvain-la-Neuve, Belgium Gedeon J. Rossouw, Hadefields Office Park, Ethics Institute of Africa, Hatfield, Pretoria, South Africa Josef Wieland, LEIZ, Zeppelin Universität, Friedrichshafen, Baden-Württemberg,  Germany

Ethical Economy describes the theory of the ethical preconditions of the economy and of business as well as the theory of the ethical foundations of economic systems. It analyzes the impact of rules, virtues, and goods or values on economic action and management. Ethical Economy understands ethics as a means to increase trust and to reduce transaction costs. It forms a foundational theory for business ethics and business culture. The Series Ethical Economy. Studies in Economic Ethics and Philosophy is devoted to the investigation of interdisciplinary issues concerning economics, management, ethics, and philosophy. These issues fall in the categories of economic ethics, business ethics, management theory, economic culture, and economic philosophy, the latter including the epistemology and ontology of economics. Economic culture comprises cultural and hermeneutic studies of the economy. One goal of the series is to extend the discussion of the philosophical, ethical, and cultural foundations of economics and economic systems. The series is intended to serve as an international forum for scholarly publications, such as monographs, conference proceedings, and collections of essays. Primary emphasis is placed on originality, clarity, and interdisciplinary synthesis of elements from economics, management theory, ethics, and philosophy. The book series has been accepted into SCOPUS (March 2019) and will be visible on the Scopus website within a few months.

Slobodan Kacanski  •  Johannes Kabderian Dreyer Kristian J. Sund Editors

Measuring Sustainability and CSR: From Reporting to Decision-Making

Editors Slobodan Kacanski Roskilde University Roskilde, Denmark Kristian J. Sund Department of Social Sciences and Business Roskilde University Roskilde, Denmark

Johannes Kabderian Dreyer Department of Social Sciences and Business Roskilde University Roskilde, Denmark

ISSN 2211-2707     ISSN 2211-2723 (electronic) Ethical Economy ISBN 978-3-031-26958-5    ISBN 978-3-031-26959-2 (eBook) https://doi.org/10.1007/978-3-031-26959-2 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Preface

It is safe to say that there are many definitions of sustainability and responsibility, and even more the methods for measuring these constructs both in research and practice. Is this a problem, and if so, what are the implications? This question has surfaced as we have conducted our own research on sustainability and responsibility, which motivated us to produce this volume, with contributions from our colleagues worldwide. There is mounting evidence that firms can both do well and do good, at one and the same time, but the measurement of this remains problematic (Kacanski, 2021). This collection of essays thus concerns itself with the implications of both definition and measurement from the perspectives of a broad group of academic researchers. Engaging initiatives on green transformation and sustainability within the corporate agendas of strategy negotiations has become one of the top priorities for firms of any size and industry (Deloitte, 2013). Firms enact and implement sustainability strategies for the sake of minimizing the negative impacts of their activities on both the environment and the wider society, but also to brand themselves and build legitimacy. Doing so may indirectly back up national strategies for achieving goals like those of the UN’s Agenda 2030 resolution. From not only scholars but also the practitioners’ points of view, comprehension of sustainability as a concept and what it entails in a broader or narrower sense is still problematic. The same can be said for the closely associated concept of responsibility. This is not only because of the scope of these concepts, but also of how individual perceptions might affect the implementation and subsequent measurement of related strategies, at both firm and broader levels. A lack of universal consensus has led firms to oftentimes use non-­ traditional approaches as a basis for evaluation of what sustainability is and what it represents for their corporate strategy (E&Y, 2016). Despite this, non-financial sustainability and responsibility strategy implementation, measurements, and reporting are nowadays equally important for both firms and their stakeholders (EU Parliament and Council, 2014). Transparency of disclosures plays a central role in increasing and demonstrating awareness about negative impacts of undergone practices. This also has impact on the decision-making

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process of stakeholders regarding the extent to which the engagements between firms and their stakeholders will unfold. Though still voluntary in many countries, firms across the world disclose non-­ financial information regarding how responsibility and sustainability concerns related to their actions are addressed in practice. Such non-financial reports have now become an integral part of annual reporting and, aside from other firm information, are used for providing sustainability-efficiency scores, such as ESGs. In the wake of the growing popularity and necessity of non-financial reporting, it has been debatable whether sustainability reporting has mainly a signaling value, or its content represents real and substantive efforts made by the firm (Ashforth & Gibbs, 1990). Either way, researchers continue to question whether one can trust firms’ self-reported measurements of corporate responsibility and sustainability. Furthermore, what are the consequences of using such published data for decision-­ making purposes, for both internal and external stakeholders? Nowadays, most national legislations have set requirements for large firms to disclose information on policies, risks, and outcomes regarding environmental matters as well as social and employee matters (EU Parliament and Council, 2014). This information disclosed within sustainability reports became equally relevant for communication with stakeholders and for decision-making purposes (Cho & Patten, 2013; Schaltegger et al., 2019). Sustainability reporting has been attempted to be standardized through many initiatives, such as the Global Reporting Initiative (GRI), OECD Guidelines for Multinational Organizations, ISO 26000, the UN Global Compact (EY, 2016), and so forth. Their aim was to facilitate content standardization that would minimize misinterpretation of those reports and enhance their comparability. As reporting standardization processes remain a challenge, many stakeholders tend to use simplified ESG scores provided by different databases as a proxy for responsibility performance (Velte, 2017; Tschopp & Huefner, 2015). They resort to these ratings instead of interpreting the content of individual sustainability and responsibility reports. Despite the efforts to standardize the usage of sustainability disclosures and ESG scores by stakeholders in decision-making processes, the reliability of these reports and scores is questionable. This is particularly due to inconsistent methodologies used over time in measuring the overall scores and their individual pillars (Timbate & Park, 2018; Lindgreen et al., 2019). The motivation for this book stems from the need to draw attention to the challenges of sustainability and responsibility measurements. A lot of existing literature focuses on only specific dimensions of sustainability (e.g., Osburg & Schmidpeter, 2013; Rosenberg, 2015) or on the implementation of sustainability-driven strategies in specific sectors (e.g., Filho et al., 2018). This book provides a broader scope for how firms and stakeholders can reach or exceed economic, social, and environmental excellence. It addresses the issues that should be solved to minimize researchers’ and stakeholders’ concerns in the contexts of research and decision-making. The book thus collects different reflections on theoretical and empirical considerations linked to the measurement of sustainability and responsibility.

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With this volume, we use different contributions to analyze various aspects of a particular sustainability theme. With short chapters, the discussions presented attempt to help the reader appreciate the different insights related to the general sustainability topic. Our objective is that the reader finds in this book critical discussions related to the current global agenda of green transition, as well as an indication of those challenges that surround sustainability and responsibility measurements. Since our main objective is to provide a general contribution that covers different aspects related to sustainability, this volume can be a reference for sustainability managers, non-financial communication managers, economics and business students, academics, and organizations working in the field of sustainability measurement and communication. The volume can also be valuable for PhD students in any area of research covering sustainability. In an initial stage of their research, PhD students can immerse themselves in the literature that covers issues related to measuring sustainability, in broader sense, as well as more specific topics such as CSR, SDGs, and ESGs. The contributions in this volume do not provide the answer on the question of “how to best” measure sustainability and responsibility, but to rather open the door for many emerging questions which surround such measurement. Roskilde, Denmark

Slobodan Kacanski

Roskilde, Denmark

Johannes Kabderian Dreyer

Roskilde, Denmark

Kristian J. Sund

Abstract

The green transition requires a sustainable development at societal level, and responsible behavior at the firm level (CSR). Yet, the very definition of sustainability and responsibility continues to be a matter of some debate. The same can be said of the measurement of such sustainability and responsibility. The aim of this edited volume is to advance the discussion of what we know about the measurement of sustainability and responsibility in the context of the firm, with a special focus on some of the management dilemmas thrown up by such measurement. In this introduction, we explore some of the consequences of the lack of stakeholder agreement regarding both definition and measurement of these central concepts and outline some of the contributions in this volume, issuing some broad recommendations.

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Summary of Contributions

Peter Alfons Schmid starts off by questioning “What is wrong with making profits?”. In his chapter, Friedman’s theory on profit maximization (Friedman, 1970) is defended as to be a social objective of firms in today’s reality. He emphasizes the need of firms to be financially sustainable over time while respecting what Friedman calls the “rules of the game” in the society. In order to defend this libertarian view, the author compares the shareholder theory with the stakeholder and principal agent theories, and demonstrates that these are not necessarily conflicting, by the contrary. Margit Neisig discusses the complexity and paradoxes in tracking, measuring, and establishing sustainability feedback. Her study underlines that measurement and reporting on ESGs and UNs SDGs lack a shared semantic reservoir, which makes it difficult for stakeholders to make decisions. She emphasizes an inappropriate character of the standardization efforts and what is needed to socially construct the required shared semantic reservoir. Kristian J. Sund points out that perceptions of reality drive action, not any objective truth (Sund, 2013, 2015). Citing recent advances in the study of managerial cognition, he unfolds the question of differences in stakeholders’ perceptions of the definition and measurement of CSR and sustainability, and how stakeholders may in fact misperceive reality, due for example to overconfidence biases (Hodgkinson et  al., 2017; Sund, 2016). He discusses this dilemma by proposing four circumstances under which stakeholders may have high or low agreement on both definition and measurement. Riccardo Torelli discusses the observed disconnection between Social Environmental Reporting (SER) and social impact. In his chapter, he argues that SERs should be complied with regulations and stakeholders’ requests, and reveal the standards and frameworks to achieve social impact. His analysis proves that SER frequently concentrates on pursuing a change of external perceptions about the company, rather than communicating and promoting the social impact. Exploring the disconnect between reporting and social impact, Vanina Farber and Patrick Reichert demonstrate that blended finance can be used as a tool to materialize and de-risk the transformation of business models. By enabling the private sector to work together with nonprofits and public actors, blended finance allows xi

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firms to identify ESG issues and create trust between stakeholders. They argue that this can be used as a powerful tool to foster ESG commitment. Jacob Dahl Rendtorff discusses how stakeholder integration in the context of integrated reports preparation can enable solving materiality issues. He develops a model for integrated reporting that can be used as a stakeholder-based decision-­ making framework which aims at ensuring disclosure and dialogue with stakeholders. The proposed framework is further applied to the Danish legislation on business financial reporting that focuses on CSR and ESF as essential dimensions of non-­ financial reporting of large businesses. Charlotte Durieux, Marine De Ridder, Anne Rousseau, Alain Ejzyn, and Frederik Claeyé unfold young professionals’ perception of responsible management. They demonstrate that, in order to engage young professionals responsibly, firms need to handle multiple tensions that emerge in a daily organizational life. The chapter contributes to understanding dilemmas on how to manage specific type of stakeholder (i.e., young professionals), which are often seen as a generation preoccupied with sustainability matters, while their perceptions and expectations may be more varied than what researchers assume. Mia Kaspersen and Thomas Riise Johansen propose that the attention is directed toward the organizational processes that shape the content and orientation of sustainability reports. Focusing on the importance of stakeholder engagement and materiality assessments, they review the literature on sustainability reporting and accountability and substantiate why firms, professionals, and policymakers in the sustainability reporting arena need to recognize that the way in which standards and regulations drive the content of reports differ for sustainability reporting relative to financial reporting. Magnus Frostenson discusses the performance-reporting gap by emphasizing the relationship between corporate sustainability performance and reporting. He argues that the performance-reporting gap is problematic from two perspectives: (1) information user perspective – as information users require useful and relevant sustainability disclosures and transparency; and (2) control perspective – as the gap reveals inadequate or lacking structures of sustainability control within the company. He suggests that the performance-reporting gap could be narrowed through clearer accountability structures and controllable sustainability processes within firms, more sophisticated materiality analyses, and also relevant strategic planning and pursuit of reporting processes. Following the problem of disconnection between reporting and corporate social performance, Sepideh Parsa and Andrea Werner show that multi-stakeholder governance mechanisms can be used as a powerful tool to materialize the transformation of business models in line with the Agenda 2030. Obliging the private sector to work together with non-profit and public actors facilitates the identification of labor rights related-issues in their global value chains and engenders trust between companies and their stakeholder groups. This, in turn, improves corporate social commitment. Dongyoung Lee demonstrates that firms that hire former ESG analysts exhibit higher CSR ratings relative to their peers. However, this finding is only limited to

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ratings from a specific rater for which individual analysts used to work. Thus, instead of assuming CSR ratings as an exogeneous evaluation of sustainability, we need to consider a possibility that the CSR ratings can be endogenously determined by the relationship between the rater and the rated via interfirm labor mobility. Michael J.  Pawlish and Stanley J.  Kowalczyk remind us of the importance of organizational culture on corporate sustainability. They argue that if organizational culture influences organizational behavior, it would be reasonable to assume that one should find an empirical link between organizational culture and corporate sustainability. This chapter explores and discusses this link empirically. Gerardus J.  M. Lucas and Te Klangboonkrong argue that some of the issues associated with financial reporting are also related to sustainability/CSR reporting. They discuss three problems: willingness, ability, and depreciation. First, firms tend to report on the areas in which they perform well at the expense of others. Second, sustainability performance is subjective to firm attributes, and what seems to be relevant for one, may not be relevant for the other. Third, the problem is that of the depreciation in the utility of performance measures over time. Patrick J. Callery addresses a series of aspects with the state of sustainability disclosure regarding the disconnect between corporate policy and outcomes, which creates the urge for heightening a focus on outcome metrics directly tied to societal goals. He suggests that enforcing accountability through explicit support of securities regulators addresses the accountability problem, and legitimizing sustainability disclosures through formal securities regulation may improve investor support, thus providing ESG investors with consistent and reliable data. Mirel Tatomir shows how frequent changes within the scope of indicators as well as the common use of binary metrics in the derivation of the Reuters ESG indicators limit their comparability over time and a more in depth understanding of ESG strengths. She also stresses that if a company with high CSR standards achieves low ESG performance due to validity problems of the ESG methodology, this tends to artificially increase the company’s cost of capital and reduce investments into those firms. Johannes Kabderian Dreyer and William Smith discuss how investors tend to act in altruistic manner when there is no government intervention. This is due to the phenomenon of “warm-glow” (Dreyer et al., 2023), by which investors derive utility not just from the financial returns on investments, but from the feeling of satisfaction they get by knowing that some of their investments are green. This can potentially increase the motivation of investors to pay more for sustainable assets, consequently decreasing the risk-adjusted returns they expect from them and thereby reducing the cost of capital of sustainable companies. This could approximate the interests of stakeholders and shareholders and align Freeman’s and Friedman’s views (Dreyer 2022; Tatomir et al., 2022a, b) potentially working as a catalyst of green transition. However, if they lack trust on ESG measures that they use as tool to select sustainable portfolios, then the warm-glow effect should disappear. Consequently, investors would request the same risk-adjusted returns from any company.

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In their chapter, Ajay Prakash, Kishore Kumar, Waseem Khan, and Mohd. Imran Siddiuei evaluate the response of legislation made in India regarding mandatory CSR rules. This chapter discusses the case for deliberation of policymakers, practitioners, scholars, and business organization to enable them to understand the implications of mandatory CSR, as well as how Indian firms respond to this legislation. They also reflect the important insights that could be useful for other countries to promulgate statutory approaches to mandatory CSR. Ritika Mahajan presents sustainability and associated regulation in the case of India. Building on that, she provides with comparative assessment of measurement frameworks and discusses challenges in measuring and reporting sustainability performance. The essay draws from the guidelines issued by the Indian government and examples of sustainability reports issued by Indian firms. Annesofie Lindskov discusses possible effects of a state of extreme competition on the degree to which firms have slack resources to devote to social responsibility efforts. The low munificence in industry environments characterized by hypercompetition (see e.g., Lindskov et al., 2021, b; Lindskov, 2022) may create challenges for firms in such environments to pursue CSR initiatives. She argues that a possible outcome in hypercompetitive environments may be polarization, where some firms will pursue CSR as a deliberate differentiation strategy, while others do not have the resources to do so. Jahan Fredskilde Gholamian Andersen and Johannes Kabderian Dreyer provide critics on methodologies used by different rating agencies to measure ESG ratings. They discuss the inconsistency problems associated with methodologies by looking into challenges that the rating agencies pose to portfolio managers. The chapter exemplifies these issues through a case study of three Danish pension funds, discussing how they use ESG ratings to shape their portfolios.

Conclusion There have been great advancements in the measurement of sustainability and responsibility in the past decades. Yet, the various chapters in this edited volume outline some of the many challenges that remain and offer a reflective discussion not only pointing out the many issues to be solved in the field for the coming years, but also their potential consequences, and the hope that resolution can bring great benefits. Just as the quality of financial disclosures is crucial for the successful auditing of yearly statement of firms (Kacanski, 2016), the quality of non-financial disclosures determines the reliability and usefulness of these. Collectively, the contributions in this volume do not provide a single answer for how to deal with measuring sustainability and responsibility, but we hope to have contributed with this volume to the critical discussion of such measurement.

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Acknowledgments We wish to gratefully acknowledge the comments and support of the series editor, Jacob Dahl Rendtorff, editors at the publisher, and various anonymous reviewers who have supported the production of this volume. We also thank our respective families for their continual patience and support.

References Ashforth, B.  E., & Gibbs, B.  W. (1990). The double-edge of organizational legitimation. Organizational Science, 1(2), 177–194. Cho, H. C., & Patten, M. D. (2013). Green accounting: Reflections from a CSR and environmental disclosure perspective. Critical Perspectives on Accounting., 24(6), 443–447. Cyert, R. M., & March, J. G. (1992). A behavioral theory of the firm (2nd ed.). Blackwell. Deloitte. (2013). CFO insights sustainability: Why CFOs are driving savings and strategy. Deloitte University Press. Dreyer, J. K. (2022). Shareholders and society: A convergency of interests? In J. D. Rendtorff & M. Bonnafous-Boucher (Eds.), New encyclopedia of stakeholders. Edward Elgar Publishing. Dreyer, J.  K., Sharma, V., Smith, T., & W. (2023). Warm-glow investment and the under-­ performance of green stocks. International Review of Economics and Finance, 83, 546–570. EU Parliament and Council. (2014). Directive 2014/95/EU of the European Union and the Council. Official Journal of the European Union. E&Y. (2016). Top priorities for US boards in 2017. EY Center for Board Matters. Filho, W. L., Marans, R. W., & Callewaert, J. (2018). Handbook of sustainability and social science research. Springer. Friedman, M. (1970). The social responsibility of business is to increase its profits. New York Times, 13 September 1970, pp. 122–126. Hodgkinson, G. P., Sund, K. J., & Galavan, R. J. (2017). Exploring methods in managerial and organizational cognition: Advances, controversies, and contributions. In Methodological challenges and advances in managerial and organizational cognition. Emerald Publishing Limited. Kacanski, S. (2016). ICT in auditing: Impact of audit quality norms on interpersonal interactions. European Financial and Accounting Journal, 11(4), 39–64. Kacanski, S. (2021). How environment, social and governance scores impact company financial performance indicators: Evidence from Denmark. In Handbook of sustainability-driven business strategies in practice (pp. 338–351). Edward Elgar Publishing. Lindgreen, A., Vallaster, C., Yousafzai, S., & Hirsch, B. (2019). Measuring and controlling sustainability: Spanning theory and practice. Published by Routledge. Lindskov, A. (2022). Hypercompetition: A review and agenda for future research. Competitiveness Review, 32(3), 391–427. Lindskov, A., Sund, K. J., & Dreyer, J. K. (2021). The search for hypercompetition: Evidence from a Nordic market study. Industry and Innovation, 28(9), 1099–1128. Osburg, T., & Schmidpeter, R. (2013). Social innovation: Solutions of a sustainable future (CSR, sustainability, ethics and governance). Springer. Rosenberg, M. (2015). Strategy and sustainability: A hardnosed and clear-eyed approach to environmental sustainability for business. IESE Business Collection. Schaltegger, S., Hörisch, J., & Freeman, R. E. (2019). Business cases for sustainability: A stakeholder theory perspective. Organization & Environment, 32(3), 191–212.

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Sund, K. J. (2013). Scanning, perceived uncertainty, and the interpretation of trends: A study of hotel directors’ interpretation of demographic change. International Journal of Hospitality Management, 33, 294–303. Sund, K.  J. (2015). Revisiting organizational interpretation and three types of uncertainty. International Journal of Organizational Analysis, 23(4), 588–605. Sund, K. J. (2016). A test of perceptual accuracy and overconfidence in a strategic issue context. In Uncertainty and strategic decision making. Emerald Group Publishing Limited. Tatomir, M., Dreyer, J. K., & Sund, K. (2022a). An economic exploration of firm-level ESG performance. Presented at the conference on international finance, climate finance and growth 2022, future finance and economics aAssociation. Tatomir, M., Dreyer, J.  K., & Sund, K. (2022b). On the unintended consequences of ESG and warm-glow investment. Working Paper. Timbate, L., & Park, C. (2018). CSR performance, financial reporting, and investors’ perception on financial reporting. Sustainability, 10(2), 1–16. Tschopp, D., & Huefner, R. J. (2015). Comparing the evolution of CSR reporting to that of financial reporting. Journal of Business Ethics, 127(3), 565–577. Velte, P. (2017). Does ESG performance have an impact on financial performance? Evidence from Germany. Journal of Global Responsibility, 8(2), 169–178.

Contents

1

 What Is Wrong with Making Profits?����������������������������������������������������    1 Peter Alfons Schmid

2

Measuring Companies Multicontextual Contribution to a Sustainable Development ����������������������������������������������������������������    9 Margit Neisig

3

Definition and Measurement of Sustainability and CSR: Circumstances of Perceptual Misalignments����������������������   21 Kristian J. Sund

4

“What I Say Is Not Necessarily What I Do”: A Critical Conceptual Analysis of the (Missing) Link between Corporate Sustainability Reporting and Social Impact������������������������������������������   27 Riccardo Torelli

5

Blended Finance and the SDGs: Using the Spectrum of Capital to de-Risk Business Model Transformation������������������������   37 Vanina Farber and Patrick Reichert

6

Responsible Business and Integrated Stakeholder Reporting: Towards a Stakeholder Model for Integrated Reporting of ESG and SDG ������������������������������������������   49 Jacob Dahl Rendtorff

7

Social Representations of Responsible Management: An Alternative Measure of Sustainability?��������������������������������������������   61 Charlotte Durieux, Marine De Ridder, Anne Rousseau, Alain Ejzyn, and Frederik Claeyé

8

Stakeholder Engagement and Materiality Assessments in Sustainability Reporting ��������������������������������������������������������������������   73 Mia Kaspersen and Thomas Riise Johansen

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9

Contents

The Performance-Reporting Gap: A Key to Understanding the Relevance of Sustainability Reporting Information to Stakeholders ����������������������������������������������������������������������������������������   85 Magnus Frostenson

10 Addressing  Challenges to Labour Rights Reporting on Global Value Chains: Social Governance Mechanisms as a Way Forward��������������������������������������������������������������   95 Sepideh Parsa and Andrea Werner 11 CSR  Ratings in the Presence of a Former Rating Agency Analyst: Evidence from LinkedIn��������������������������������������������  107 Dongyoung Lee 12 Organizational  Culture and the Moving Target of Corporate Sustainability: An Exploratory Investigation����������������  121 Michael J. Pawlish and Stanley J. Kowalczyk 13 A  Cautionary Tale: Lessons from the Strategic Use of Financial Reporting����������������������������������������������������������������������  133 Gerardus J. M. Lucas and Te Klangboonkrong 14 Corporate  Sustainability Disclosure Standards Must Emphasize Outcomes Over Policies ��������������������������������������������  141 Patrick J. Callery 15 ESG  Data Challenges: User Discretion Is Advised ������������������������������  151 Mirel Tatomir 16 Altruism  in Investor Preferences: A Catalyst for the Green Transition������������������������������������������������������  159 Johannes Kabderian Dreyer and William Smith 17 Self-Induced  Versus Structured Corporate Social Responsibility: The Indian Context��������������������������������������������������������  167 Ajay Prakash, Kishore Kumar, Waseem Khan, and Mohd Imran Siddiquei 18 Measuring  Sustainability in India: A Comparative Assessment of Frameworks and Key Challenges����������������������������������  179 Ritika Mahajan 19 Does  Hypercompetition Foster Corporate Social Responsibility? A Research Framework of the Hypercompetitive Effects on ESG Performance������������������������������������������������������������������  197 Annesofie Lindskov 20 The  Integration of ESG Ratings in Danish Pension Funds: Interviews with Pension Fund Managers����������������������������������  209 Jahan Fredskilde Gholamian Andersen and Johannes Kabderian Dreyer

Contributors

Jahan  Fredskilde  Gholamian  Andersen  Department of Social Sciences and Business, Roskilde University, Roskilde, Denmark Patrick J. Callery  Sprott School of Business, Carleton University, Ottawa, Canada Grossman School of Business, University of Vermont, Burlington, VT, USA Frederik  Claeyé  ICHEC  – Brussels Management School, Woluwe-Saint-­ Pierre, Belgium Marine  De Ridder  ICHEC  – Brussels Management School, Woluwe-Saint-­ Pierre, Belgium Johannes  Kabderian  Dreyer  Department of Social Sciences and Business, Roskilde University, Roskilde, Denmark Charlotte  Durieux  ICHEC  – Brussels Management School, Woluwe-Saint-­ Pierre, Belgium Alain  Ejzyn  ICHEC  – Pierre, Belgium

Brussels

Management

School,

Woluwe-Saint-­

Vanina  Farber  International Institute for Management Development (IMD), Lausanne, Switzerland Magnus  Frostenson  Department of Welfare, Management and Organisation, Østfold University College, Halden, Norway Örebro University School of Business, Örebro, Sweden Thomas Riise Johansen  Copenhagen Business School, Frederiksberg, Denmark Mia Kaspersen  Copenhagen Business School, Frederiksberg, Denmark Waseem Khan  Department of Management, Jamia Hamdard, New Delhi, India

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Contributors

Te  Klangboonkrong  Research and Enterprise Division, University of Leicester, Leicester, UK Stanley  J.  Kowalczyk  Lam Family College of Business, San Francisco State University, San Francisco, CA, USA Kishore  Kumar  School of Business and Management, Christ (Deemed to be University), Ghaziabad, Uttar Pradesh, India Dongyoung Lee  Desautels Faculty of Management, McGill University, QC, Canada Annesofie  Lindskov  Department of Social Sciences and Business, Roskilde University, Roskilde, Denmark Sino-Danish College (SDC), University of Chinese Academy of Sciences, Beijing, China Gerardus  J.  M.  Lucas  Nottingham University Business School, University of Nottingham, Nottingham, UK Ritika Mahajan  Department of Management Studies, Malaviya National Institute of Technology, Jaipur, India Margit Neisig  Department for Social Sciences and Business, Roskilde University, Roskilde, Denmark Sepideh Parsa  Middlesex University, London, UK Michael  J.  Pawlish  School of Business and Digital Media, Georgian Court University, Lakewood, NJ, USA Ajay  Prakash  Department of Business Administration, University of Lucknow, Lucknow, Uttar Pradesh, India Patrick  Reichert  International Institute for Management Development (IMD), Lausanne, Switzerland Jacob  Dahl  Rendtorff  Department of Social Sciences and Business, Roskilde University, Roskilde, Denmark Anne  Rousseau  ICHEC  – Brussels Management School, Woluwe-Saint-­ Pierre, Belgium Peter Alfons Schmid  FOM University of Applied Sciences, München, Germany Mohd Imran Siddiquei  Department of Business Administration, University of the People, Pasadena, CA, USA William  Smith  Department of Economics, Fogelman College of Business and Economics, University of Memphis, Memphis, TN, USA

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Kristian J. Sund  Department of Social Sciences and Business, Roskilde University, Roskilde, Denmark Mirel Tatomir  Department of Social Sciences and Business, Roskilde University, Roskilde, Denmark Sino-Danish College (SDC), University of Chinese Academy of Sciences, Beijing, China Riccardo  Torelli  Department of Economic and Social Sciences, Università Cattolica del Sacro Coure, Piacenza, Italy Andrea Werner  Middlesex University, London, UK

Chapter 1

What Is Wrong with Making Profits? Peter Alfons Schmid

Abstract  Over 50 years passed since Friedman’s famous doctrine that only individuals but not businesses have an obligation to be socially responsible. In the meantime, the concept of corporate social responsibility became a centerpiece of modern business ethics. It is undisputed that the license to operate requires businesses to be in line with society’s norms. Today, society expects from enterprises to meet their social responsibilities. Therefore, businesses need to measure their corporate social performance. With accurate measures, transparency increases, and information asymmetries shrink. Nevertheless, I argue that Friedman’s arguments are still valid, and, in the end, the most important corporate social responsibility is to increase long-run profits. This is no contradiction, however, as transparent reports on businesses’ activities serve profitability. I provide strong theoretical arguments for my standpoint based on a narrative approach.

1.1 Introduction In his famous monograph Capitalism and Freedom Milton Friedman concluded that the only social responsibility of business is to “increase its profits so long as it stays within the rules of the game” (Friedman, 1962, p. 160). Eight years later, Friedman’s claim became familiar with the broader public when he contributed to the New York Times Magazine an article titled The Social Responsibility of Business is to Increase its Profits (Friedman, 1970). He argued that only individuals have social responsibilities. Firms, however, are constructs founded for a specific purpose. For Peter Drucker, the inspiring and influential economist, well-known for the introduction of the concept management by objectives, “there is only one valid definition of a business purpose: to create a customer.” (Drucker, 1954, p. 37). Businesses accomplish P. A. Schmid (*) FOM University of Applied Sciences, München, Germany e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Kacanski et al. (eds.), Measuring Sustainability and CSR: From Reporting to Decision-Making, Ethical Economy 64, https://doi.org/10.1007/978-3-031-26959-2_1

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this goal by their efforts to generate and deliver value propositions (Osterwalder & Pigneur, 2010). This way, business ideas become business models. Only in case earnings cover at least total costs, business models are sustainable. Of course, the simple Friedman doctrine needs specification. One must determine the time horizon for profit maximization and, above all, define profit. A myopic shareholder value focus is not reasonable, but the long run maximization of a firm’s economic value is. Friedman’s doctrine was dominant in the last third of the twentieth century. It inspired research and has been one the most influential ideas in economics and management. In the last decades, however, Friedman’s doctrine became disputed, both in academia and practice. The 50th anniversary in 2020 produced a range of critical essays that dismissed the theory as flawed and morally questionable (inter alia Mayer et al. (2020)). Friedman’s proponents and opponents seem to be like privates, stuck in the trenches. Consequently, I ask the following: Is the Friedman doctrine outdated today or what is wrong with making profits? I will answer that Friedman’s pledge is not obsolete and that there is nothing wrong with making profits. The essay has three main sections: First, corporate social responsibility (hereinafter “CSR”) is at the heart of business leadership and might even be financially beneficial. I provide recent evidence on the relationship between corporate financial (hereinafter “CFP”) and corporate social performance (hereinafter: “CSP”). Second, profitability follows from the need of sustainability. Third, the need to remember businesses of their social responsibility is due to market failures. It is important to find an efficient way to reach environmental, social and governance (hereinafter “ESG”) goals that operationalize CSR. One must reduce information asymmetries and internalize externalities. Summarizing arguments, I claim that measuring CSR is reasonable to decrease information asymmetry and increase market efficiency, but it still makes perfect sense to make and increase profits.

1.2 Profits and Corporate Social Responsibility Academic curricula usually confront business and economics students with the two, allegedly, antagonistic concepts “shareholder value” and “stakeholder value”. In my early college days, the claim “shareholder value is Moses and the ten commandments” found in lecture notes amused me. Other research prefers the stakeholder value concept (inter alia Freeman, 2010).1 Whereas the former demands profit maximization for the residual claimholders, the latter identifies benefits from complying with the interests of all stakeholders. Expenses in the context of CSR are only additional costs according to the shareholder and investment according to the stakeholder value approach. For both concepts, the principal agent theory (Jensen & Meckling, 1976) offers important implications. Preferences and personal benefits of

 First published in 1984.

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agents might trigger CSR overinvestment (Habermann (2021)). Table 1.1 summarizes the main arguments with respect to the two competing concepts and the principal agent theory: Today, management theory and practice account for CSR. Failures to meet their social responsibilities are a severe risk for enterprises. Thus, no business risk research report can neglect analyzing whether businesses are in line with the sustainable development goals. Business ethics has become an integral part of (academic) management programs and enterprises spend huge efforts showing how they meet their responsibilities for society. Without doubt, CSR is essential: reputation, trustworthiness, loyalty from suppliers, customers, employees, and investors alike are the base for the license to operate. And it is at stake in case companies do not meet the expectations from society. Thus, there are good arguments for a positive correlation between CFP and CSP. Serving the interests of stakeholders and complying with CSR might be in the best interest of shareholders. In case this argument is valid the conflicts between the shareholder and stakeholder value concepts do not exist. As there are three channels (see Fig. 1.1) through which CSP might affect CFP, the relationship is, however, disputed on theoretical grounds. Overinvestment and compliance costs have a negative impact, compliance itself a positive one. Empirical evidence suggests an inconclusive relationship between CFP and CSP (Habermann, 2021). Table 1.2 summarizes some recent research on the relationship for distinct parts of the world. Usually market-based and accounting-based variables are used to measure CFP.  These dependent variables are explained by an overall score, e.g., the ESG score which summarizes the firm’s performance with respect to environmental, social and governance themes. Starting with US firms Habermann and Fischer (2023) is of particular interest as this research cannot identify a dampening effect of CSP on the bankruptcy likelihood in times of economic upswing and even find rises of CSP to increase the risk of bankruptcy. On the contrary, Boubaker et  al. (2020) show that higher CSP decreases such likelihood in times of downturns. Interestingly, too, Tsai and Wu (2022) find a positive relationship between CFP and CSP improvements for US firms in case CFP is measured by stock returns. For German corporations Habermann (2021) does not show an overall significant relationship between CFP and CSP.  Only the social pillar is significantly Table 1.1  Shareholder value, stakeholder value, and the principal agent theory Quintessence

Shareholder value Profit maximization for shareholders (residual claimholders)

Implications for CSR

CSR expenses = additional cost

Stakeholder value Benefits from complying with the interests of stakeholders Positive relation of corporate social and financial performance

Principal agent theory Problem: Deadweight loss from preferences and personal benefits of agents Overinvestment in CSR

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Fig. 1.1  Corporate social and financial performance Table 1.2 Empirical evidence on the relationship between corporate social and financial performance

Time and geography

Dependent variable

Habermann and Fischer (2023) 2010–2019, listed US firms (6696 firm-year obs.) Bankruptcy likelihood (Altman Z score)

Independent ESG score variable

Relationship No overal significance

Tsai and Wu (2022) 1991–2012, listed US firms

Stock return

Habermann (2021) 2015–2019, German listed companies in the prime standard (363 firm-year obs.) Return on assets, Tobin’s q, market capitalization

CSP construct ESG score with six dimensions (no governance) Positive No overall significance

Tunio et al. (2021) 2008–2019, 30 Chinese commercial banks

Adegbite et al. (2019) 2002–2015, 314 UK listed companies (financial & non-financial)

Return on assets, return on equity, nominal interest margin profit ESG score

Return on assets, return on equity, share price performance

U-shaped, opened upward

Positive, virtuous cycle

CSP construct with seven dimensions (no governance)

positively related with market capitalization. In a model specification which accounts for ESG overinvestment, an overall positive effect on market capitalization can be shown whereas overinvestment in the social pillar is related negatively. As no

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effect on the accounting-based CFP variable can be proven Habermann (2021) suggests that “investors’ perception of CSP tends to be a key driver” and in light of the negative effect of overinvestment that “investors and society should be aware of the value-destroying CSP over-investment effect” (Habermann, 2021, p. 359). For UK firms, however, Adegbite et  al. (2019) detect a positive relationship between CFP and CSP and a virtuous cycle with past CFP increasing present CSP which raises future CFP. In addition, their “results suggest that financially stable companies can afford to be socially responsible” (Adegbite et  al., 2019, p.  127). Finally, Tunio et  al. (2021) investigate a sample of Chinese banks for which the identify a U-shaped relationship with lower as well as higher CSP levels associated with higher returns on assets. In addition, the political and regulative framework within which companies operate seems to influence ESG activities. One might assume – as shown by Cassely et  al.  (2021)  – that liberal market economies induce businesses to decrease their CSP in times of economic crisis in accordance with the additional cost argument. Not so in coordinated market economies where firms redefined their ESG activities according to Cassely et al. (2021). In a nutshell, the shareholder value approach is still formative in liberal market economies, but not in coordinated ones. Summarizing, recent research on the relationship between CFP and CSP is ambiguous: For US and German firms, accounting-based dependent variables are not significantly related to CSP. For the UK sample, a positive relationship is found in case of the return on equity but not for the return on assets. For the Chinese sample, the relationship is U-shaped for the return on assets. Based thereon, there is no strong evidence for the financial benefits of ESG activities. For the market-based dependent variables there is more support for a positive relationship between CFP and CSP. Contrary to accounting-based variables there is some evidence for the financial benefits of ESG activities. There is no evidence for value-destroying effects of CSP as long as there is no CSR overinvestment. Overinvestment seems to deteriorate financial performance. This strengthens the shareholder value aspect of CSR as additional costs and affirms the implications from the principal agent theory. The perception of societies seems to play a role for firms’ CSR. Especially for market based financial performance and in times of crisis ESG activities might be value preserving and enhancing.

1.3 Profits and Sustainability CSP is often related to sustainability. Firms, of course, should follow a sustainable path and their business models should be viable not only in the short run. But is the relation of CSP and sustainability to the point and how is profit-seeking behavior related to sustainability?

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Usually, sustainability has three dimensions. “Sustainable development requires balanced integration of economic, social and environmental dimensions” (United Nations ESCAP, 2015, p. 7). The European Banking Authority declares for banks’ supervision that the “sustainability of the institution’s strategy is to be determined on the basis of its ability to generate acceptable returns over a forward-looking period of at least 3 years” (EBA, 2014, p. 34). Later, it itemizes to check the “plausibility of the institution’s (…) projected financial performance (…), the impact on the financial performance of the supervisory view (…) and the risk level of the strategy” (EBA, 2014, p. 41). It is recommended to transfer the SREP guidelines developed for the supervision of banks to non-financial enterprises. Thus, making profits is not wrong on sustainability grounds. Without profits, enterprises will not be able to serve the needs of its stakeholders in the long run. Customer creation requires profitability in the long run, too. Innovation and Schumpeterian creative destruction are rewarded by a strong market position and profits. In the modern start-up economy, the prospect of profits ensures the allocation of financial resources. Established companies need profits to finance research and development. Thus, making profits and sustainability are no contradictions, but profits are a prerequisite for sustainability.

1.4 Profits, Market Efficiency, and the Rules of the Game So far, we can conclude: First, profits and compliance with CSR are not contradictory but can support each other. Second, sustainable businesses need profits or at least the prospect of profits. Thus, prima vista, one might argue that it is sufficient to measure CSP by profitability, just like in the Friedman doctrine. This, however, is shortsighted. Friedman’s doctrine requires markets to work perfectly, and information asymmetry damages market efficiency. Stakeholders’ decisions with respect to the offerings of firms, i.e., products, investment opportunities, work contracts, supply partnerships, rely on information. Social norms and expectations for CSR compliance require trustworthy data on firms’ CSP. Thus, it is not sufficient to have a look at profitability only. One needs measures disclosing firms’ ESG activities. Moreover, externalities cause market failures. In this case, firms do not carry all costs or benefits. Pollution, for example, is a negative externality, as part of the pollution costs are borne by society and future generations. For such failures, economists developed a broad range of instruments that serve the internalization of externalities. Internalization means that firms carry full costs and benefits which helps markets to fulfill their allocation and transaction purposes. Regulations in line with the market define the playing field and can solve the externalities problem. Insofar, CSR is unnecessary as compliance with legal constraints is mandatory and within these limits firms can pursue to increase their profits. For example, tradeable, but limited pollution allowances restrict emissions to acceptable levels, secure cost efficiency in case of heterogenous polluters and

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stimulate technological progress. If set low enough such allowances are efficacious (Kampmann & Walter, 2019, p. 96). The theory is good but in practice pollution can be exported in case allowances are not implemented globally or at least by the planet’s most important economies. Thus, many practitioners and academics alike demand a broader approach including all policies, even a green monetary policy. This demand is controversial as most central banks’ mandate is to secure price stability which might be endangered when the monetary authorities follow other political goals. Allegations of arbitrariness could cause reputation losses. In addition, monetary policy might lack efficacy (Fuest et al., 2021). The example of green monetary policy can be transferred to CSR.  The goals behind CSR are venerable. But one must ask whether a society’s goals can be achieved with better means. In other words: Is it the fault of business that governments have not implemented sufficient regulations so far? Summarizing, CSP disclosures are necessary for market efficiency. In case of externalities, I argue for internalization by regulations and firms can seek profits within the rules.

1.5 Conclusion Friedman’s doctrine has been very influential in liberal market economies but has lost steam in the last decades. Failures such as the financial crisis 2007–2008 and the following sovereign debt crisis are associated with misguided and greedy management. The same is claimed in the light of climate change and disappointing progress in limiting global emissions. The solution to such problems is a regulatory framework that defines the rules of the game and prohibits systemic misallocations and aberrations. Once the playing field for businesses is defined profit-orientated firms should be measured by their profitability. But what about nonprofit firms? Obviously, profits are not foreseen for them. But they must pursue their purpose in a cost-efficient manner for success. Thus, financial sustainability is a conditio sine qua non for all firms. Summarizing, sustainability should be measured by profitability for profit-orientated firms and by cost-efficiency for nonprofit organizations. But is it realistic to implement a regulatory framework for the playing field of business? Global regulations for global problems are difficult to implement. Even local or regional regulations might not be in the best interest of society due to crony capitalism. In such an environment reliable and valid CSP measures are necessary to inform market participants how their prospective partners comply with their expectations. As a result, profitability alone is not sufficient to evaluate compliance with CSR. Concisely: There is nothing wrong with making and increasing profits if firms are within the rules of the game. One can implement such rules in a way to overcome market failures. Besides, CSP can be beneficial for CFP.  For information transparency trustworthy measures of CSP are required.

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References Adegbite, E., Guney, Y., Kwabi, F., & Tahir, S. (2019). Financial and corporate social performance in the UK listed firms: The relevance of non-linearity and lag effects. Review of Quantitative Finance and Accounting, 52, 105–158. Boubaker, S., Cellier, A., Manita, R., & Saeed, A. (2020). Does corporate social responsibility reduce financial distress risk? Economic Modelling, 91, 835–851. Cassely, L., Larbi, S. B., Revelli, C., & Lacroux, A. (2021). Corporate social performance (CSP) in time of economic crisis. Sustainability Accounting, Management and Policy Journal, 12(5), 913–942. Drucker, P. F. (1954). The practice of management. Harper & Row. European Banking Authority. (2014). Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP). Freeman, E. R. (2010). Strategic management: A stakeholder approach. Cambridge University Press. Friedman, M. (1962). Capitalism and freedom. The University of Chicago Press. Reprint from 2020. Friedman, M. (1970, September 13). The social responsibility of business is to increase its profits. The New York Times Magazine. Fuest, C., Grüner, H.  P., & Wieland, V. (2021). Europäische Zentralbank auf grünen Abwegen. Available at: https://www.ifo.de/node/63343 Habermann, F. (2021). Corporate social performance and over-investment: Evidence from Germany. Journal of Global Responsibility, 12(3), 347–363. Habermann, F., & Fischer, F.  B. (2023). Corporate social performance and the likelihood of Bankruptcy: Evidence from a period of economic upswing. Journal of Business Ethics, 182, 243–259. https://doi.org/10.1007/s10551-­021-­04956-­4 Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economcis, 3(4), 305–360. Kampmann, R., & Walter, J. (2019). Angewandte Wirtschaftspolitik. De Gruyter. Mayer, C., Strine Jr., L.  E., & Winter, J. (2020). 50 years later, Milton Friedman’s shareholder doctrine is dead. Available at: https://fortune.com/2020/09/13/ milton-­friedman-­anniversary-­business-­purpose/ Osterwalder, A., & Pigneur, Y. (2010). Business model generation: A handbook for visionaries. Wiley. Tsai, H.-J., & Wu, Y. (2022). Changes in corporate social responsibility and stock performance. Journal of Business Ethics., 178, 735–755. https://doi.org/10.1007/s10551-­021-­04772-­w Tunio, R. A., Jamali, R. H., Mirani, A. A., Das, G., Laghari, M. A., & Xiao, J. (2021). The relationship between corporate social responsibility disclosures and financial performance: A mediating role of employee productivity. Environmental Science and Pollution Research, 28, 10661–10677. United Nations ESCAP. (2015). Integrating the three dimensions of sustainable development. Available at: https://www.unescap.org/sites/default/files/Integrating%20the%20three%20 dimensions%20of%20sustainable%20development%20A%20framework.pdf Peter Alfons Schmid is a professor of business administration at FOM  University of Applied Sciences München and also teaches at Free University Bozen-Bolzano. Before becoming professor, he co-founded and led a start-up in the software industry. After graduation he worked for tax consultancies. He earned his doctorate and an equivalent to a Master’s degree at the Catholic University Eichstätt-Ingolstadt.  

Chapter 2

Measuring Companies Multicontextual Contribution to a Sustainable Development Margit Neisig

Abstract  This essay discusses the complexity and paradoxes in tracking, measuring, and establishing a sustainability feedback mechanism relevant not only for companies, but for “business ecosystems” to achieve the UN SDGs based on ESG reporting. This study underlines how measurements and reporting of ESG and the UN SDGs lack a shared semantic reservoir, which makes it more difficult for various decision-makers to make decisions providing for the huge course-correction needed  – or with other words: it makes it easier to continue the present way of operation or make a to slow course-correction. The contribution of the research illuminates the inappropriate character of the standardization efforts and what is needed to socially construct the required shared semantic reservoir. Last, but not least, the research illuminates the disappointing news, that the large fiscal recovery investments related to the Covid-recovery, have also not provided the course-­ correction hoped for.

2.1 Introduction Since 2015, the objectives agreed to by the 193 UN member countries have been to reach the 17 Sustainable Development Goals (SDGs) by 2030. However, the Social Progress Index (SPI) measurement indicates, that by the current trends, the SDGs will not be achieved until 2082, and that the Covid-19 pandemic has delayed the progress by at least 10 years until 2092 (Macht et al., 2020). Thus, to obtain the goals in due time, a thorough course correction is needed. This will require redefining the purpose of business and scaling up their social impact. This may seem difficult due to “the gap between good intentions and real actions; conflict between the current economic system and SDG thinking; limited M. Neisig (*) Department for Social Sciences and Business, Roskilde University, Roskilde, Denmark e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Kacanski et al. (eds.), Measuring Sustainability and CSR: From Reporting to Decision-Making, Ethical Economy 64, https://doi.org/10.1007/978-3-031-26959-2_2

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understanding of how business is embedded in society; and capacity constraints in developing countries” (Murillo et al., 2020). Reaching the SDGs has been calculated to cost $115 trillion (Eccles & Karbassi, 2018), which ideally should be shared 50:50 between the public and private sectors. According to the World Bank the world GDP was about $ 84,7 trillion in 2020 (World Bank, 2021). This means, that during the15 years the world had to reach the goals about 10% of the world economy should be invested aligning with the SDGs. It is do-able, but the world is substantially behind these investment goals. Eccles and Karbassi (2018) estimates a $2,5 trillion per year funding gap (relative to the 15 years for the goal-period). However, arguments have been, that drivers for such a magnificent course correction may not be unrealistic as major countries are investing heavily in the recovery from covid-19 (Hepburn et al., 2020), and as a huge intergenerational wealth is about to be transferred from baby boomers to their children (people from 25 to 40  years old), known to think more sustainably about investments (MSCI ESG Research LLC, 2020). This essay will discuss the complexity and paradoxes in tracking, measuring, and establishing a sustainability feedback mechanism (Neisig, 2021b) relevant not only for companies, but for “business ecosystems” to achieve the SDGs. ESG (Environment, Social, Governance) reporting, and investments are on the rise, but it is a social construct without a clear definition (Eccles et al., 2020). Although responsible investments as a phenomenon have been well known since the 1960s, ESG investments as institutionalized phenomenon originate from the UN PRI (United Nations’ Principles for Responsible Investments) launched in 2006 (Ng, 2019). The meaning to be ESG compliant, however, is still contested, as are the data used, and the way in which it is implemented in an investment portfolio is up to the different actors in the financial industry to decide. A multicontextual view on what sustainability means, and how ESG is implemented in the research, investment process and throughout the value chain of the services is lacking. This not only allows for green washing, but also hampers an implementation related to companies’ core businesses and reach for shared value throughout the value chain (Porter et  al., 2019). Furthermore, it may explain, why the gap to reach the SDGs is widening despite increased ESG investments (Pucker, 2021). Third-party analyses need to be part of such an accountability framework. Holding indices like the SPI (Social Progress Index) or the SDGs Index against ESG-reporting based on next generation of corporate sustainability metrics (Esty & Lubin, 2020) may not only uncover a company’s shared value approach and value chain impact, but also hold it against local, regional, and global gaps in reaching the SDGs. This may furthermore uncover needs for better regulations or invoke citizens observations of the lack of actions. This essay focuses on the research question: What does the lack of a shared semantic reservoir mean in terms of measuring, reporting, and making decisions on sustainable investments? This question is informed by social systems theory (Luhmann, 1995, 2012, 2013). This theoretical framework is chosen, as it underlines the difficulties of different social systems to communicate due to inward-looking idiosyncrasies, but also the possibility of

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structural couplings to be rearranged to become more sensitive towards the environment in striving for sustainability. Two systems are structurally coupled when they become dependent on one another for their own on-going operations. For systems to structurally couple, their communication needs to communicate. However, it is not an easy nor a rational task for social systems to rearrange unsustainable structural couplings. To achieve the SDGs requires many social systems to align and structurally couple towards these goals in a concerted way. For that purpose, the emergence of a suitable shared semantic reservoir supportive for reflection within many separate systems simultaneously is needed (Neisig, 2017, 2021a, b). Shared semantics is shared language, models, standards, measurements, reporting ets. A shared semantic reservoir, consequently, is an important concept for this essay, as the SDG-language, ESG-language, measurements, methods, data capturing technologies, data indexes, reporting standards etc. are parts of semantics, which may eventually end up becoming a shared semantic reservoir. If such a shared semantic reservoir is lacking, structural changes will slow down due to lack of trust and lack of ability for communication to communicate. The essay is structured as follow: first, this essay, will document the lack of a shared semantic reservoir in terms of how to measure and report companies ESG-­ contribution and compare to the development of the UN SDGs. Such a lack makes it difficult to prioritize and make decisions about investments and/or interventions at different levels of and by different social systems. Thus, different social systems have difficulties in aligning sustainably in a concerted way as the communication does not communicate across different social systems. Second, different efforts to create ESG standardization, as an effort to create some sort of a shared semantic reservoir, are traced. Third, it is discussed if SASB/GRI standards do link to the SDG or Social Progress Indices, and what the difficulties in doing so are. It is found that efforts to create such a coherent, shared semantic reservoir still have a long way to go. In the conclusion, it is argued, that the lack of a shared semantic reservoir makes it easier to continue the present way for social systems to operate, or to make a too slow course correction.

2.2 Measuring How Far We Are from the SDG -The Lack of a Shared Semantic Reservoir To begin with, it is worth mentioning, that the SDGs are criticized for their contradicting and non-sustainable starting point. According to Huck (2019) the inconsistency of the SDGs creates different views at a meta-theoretical level, which creates different views and interpretations with impact on the scope, choice, and interpretation of indicators and the method of measuring them, and even on the outcome and its interpretation. Therefore, the applicability of indicators depends on the basic understanding of the terms, and the different methods of interpretation of the SDGs.

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The global indicator framework for SDGs was developed by the Inter-Agency and Expert Group on SDG Indicators (IAEG-SDGs). Deciding upon indicators has shown to be a political complicated process, and not all indicators are agreed upon or available yet (Huck, 2019). Therefore, other series of reports, less complicated, has been developed. The Sustainable Development Report (Sachs et al., 2021) (including the SDG Index & Dashboards) is produced with support from the UN Sustainable Development Solutions Network (SDSN). The report is not an official monitoring tool but uses publicly available data published by official data providers (World Bank, WHO, ILO, others) and other organizations including research centers and non-­ governmental organizations. The 2021 report (Sachs et al., 2021) states that before the pandemic hit, the world was making significant progress on SDG 1 (No Poverty) and SDG 9 (Industry, Innovation, and Infrastructure), while lagging or even going backwards on SDG 12, 13,14 & 15: responsible consumption and production, climate action, life below water and life on land. While a minor progress in the world average from index 64 to index 65,8 was reached in the years 2015–2019, the pandemic has been a major setback for sustainable development everywhere, and the index has decreased to about 65,6 from 2019 to 2020. A score of 100 indicates that all SDGs have been achieved. The best performing countries are Finland (index 85,9), Sweden (index 85,6) and Denmark (index 84,9). Another available measurement is the Social Progress Index (SPI), which is a well-established measure, published since 2013. The organization behind this index is The Social Progress Imperative, an organization headed by Michael Green, and a board of directors, supported by strategic partners such as Deloitte, the Skoll Foundation and academic advisors such as Michael E. Porter and Scott Stern. The group was formed in 2009 after the financial crash. Unlike the Sustainable Development Goals, which are by definition a list of goals, the SPI is built as a conceptual model. Because of the conceptual model, the SPI can provide a snapshot of a country’s overall progress towards the SDGs in a way that the goals themselves, with their wide array of unweighted indicators and contradictions, cannot (Social Progress Imperative (2020). SPI only measures outcome, not input. Unlike other wellbeing indexes as e.g. the UN Human Development Index or the OECD Better Life Index, the Social Progress Index is based entirely on social and environmental indicators separating the social and environmental from the economic; not because the economy does not matter, but the separation makes it possible to hold SPI against economic metrics making it possible to compare social progress with economic measures and understand how the economy matters. Separating the measures shows, that social progress and economic growth is not the same (acknowledging that economic and other social systems are not always aligned). Thus, the USA has a higher GDP per capita than Denmark, but ranks lower in SPI. SPI is as the SDG Index also not based on primary data, but all data are taken from existing secondary sources, valuing sources that are trusted, and widely geographically available. The SPI also captures outcomes related to all 17 SDGs and

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reflects 131 out of 169 targets (Social Progress Imperative, n.d.) supporting the SDG implementation, as a rapid-assessment approach. As it is a more flexible tool, it can also be adapted to any level of geography and any sector, from communities to metropoles to public institutions to local businesses. As mentioned, an analysis provided by The Social Progress Imperative shows that while some SDGs have made good world-wide progress (such as Nutrition and Basic Medical Care), other goals have been stagnant or even reversed. In 2020, the index measured ‘social progress’ going backwards and it was predicted that the world would not have achieve the SDGs until 2082, and now it is delayed 10 years until 2092 caused by the covid-19 pandemic. Relative to the world’s economic performance, mainly environmental quality, personal rights, inclusiveness, water and sanitation, as well as shelter is underperforming (Deloitte, 2020). Measurements by the SDG Index and the SPI index thus reaches results not far from each other. However, measuring the progress towards the SDG’s is one thing, − and it shows a far too slow pace in reaching the goals. Another thing is to relate this to reporting from companies and public authorities and judge on the effects of their contributions. Below, we will evaluate the efforts to create standardizations as to make such comparisons possible.

2.3 The Hunt for a Shared Semantic Reservoir – Efforts to Create Standardizations Relating ESG Measurements and SDGs ESG (Environment, Social, Governance) reporting is not directly linked to the SDGs, but originates from the 1960, and is used for socially responsible investment (SRI) strategies. Acknowledging the financial value of ESG-reporting and associated risks has more recently been a driver for an increased interest in ESG data and reporting (Amel-Zadeh, 2018). However, ESG is not a fixed concept, and Eccles et al. (2020) states, that without a universally accepted definition of ESG metrics, each data vendor developed its own methodology for measuring ESG data, and their own set of indicators, to best capture their preferred conceptualization of materiality. Eccles and Stroehle (2018) underline the importance of understanding ESG measures as a social construct, and Eccle (2020) further underlines the substantial deviation of ESG-measures due to the social construction. Pucker (2021) states, that ESG measurement and reporting seem to have become ends to themselves, and despite responsible investments have grown to more than $30 trillion, equal to one-­ third of all professionally managed assets, both social inequality and CO2-emissions have increased in the past two decades. According to Murillo et al. (2020), also the interest in sustainable responsive investments is very uneven across the world: Europe (52.6%), followed by Australia & New Zealand (50.6%), Canada (37.8%), and the United States (21.1%). Asia has the lowest score at 0.8% with Japan scoring at 3.4%. The global average score is 26.3%. Porter et al. (2019) finds, that ESGs are

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an ad-on and not center stage of the business strategy. They criticize ESG-metrics with little financial materiality considerations and hold that “ESG factors are not material to the performance of a particular business, nor do they highlight areas where the business has the greatest impact on society”. Pucker (2021) adds to the criticism, by pointing to nonstandard metrics, insufficient auditing and unreliable ESG ratings. He also underlines the complex global value chains, in which it is almost impossible to trace and account for up- and downstream resource consumption and carbon emissions. Even though advances in technology (artificial intelligence, satellites, sensors, blockchain, and so forth) creates new tools for measuring and monitoring the environmental impact, vital sustainability metrics still has gaping holes. Furthermore, financial trade-offs mean that if companies can ignore externalities, not nearly enough capital is allocated for impact investments to address the huge challenges. The next generation of ESG-reporting, however, is about to be tightened up and become more standardized, comparable, and targeted at some industrywide material issues. An example of standardization is SASB, that are developing 77 industry-­ standards (financial material) – based on 26 broadly relevant sustainability issues organized under five sustainability dimensions. The question is, if some of these measures could maybe be aligned with the SDG-index or the SPI-index? If so, this, is to be understood as a hunt for a shared semantic reservoir as requested by Neisig (2021a, b) to make rearranging of structural coupling possible. However, according to the CEO of the SASB Foundation, Janine Guillot, this is not the aim: “Other tools have been designed for those purposes, such as the SDG Compass, developed by the Global Reporting Initiative (GRI), the UN Global Compact (UNGC), and the World Business Council on Sustainable Development (WBCSD), and the core indicators developed by the International Standards of Accounting and Reporting (ISAR)”, (Guillot, 2020). The Global Reporting Initiative (GRI) guideline was established in 1997 by the Coalition for Environmentally Responsible Economies (CERES) with the support of the United Nations Environment Program (UNEP). The aim was to create the first accountability mechanism to ensure companies adhere to responsible environmental conduct principles, which was then broadened to include social, economic and governance issues (Global Reporting Initiative, n.d.). According to “A Practical Guide to Sustainability Reporting using GRI and SASB Standards” (GRI and SASB, 2021) GRI and SASB can be used together. However, the respondents in their survey (GRI and SASB, 2021) tell, that we are still far from a shared semantic reservoir. There are problems balancing relevance and comprehensiveness of data. It is difficult to assess the usefulness of data that is asked for by stakeholders that are not investors. Divergent approach to materiality is the biggest issue, and there are slight differences in the metrics, too. Further, there is a lack of actionable linkages between the standards, and it is a challenge to communicate the benefit of using both sets of standards, and justifying the costs involved. It is a challenge to determine which SASB standards is most relevant, and the mapping requires a lot of resources as non-financial reporting is not very automated compared to the tools available for financial reporting. Another challenge for

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standardization is, that the world, the risk profiles, and the opportunity profiles are changing faster than the standards can keep up with. The conclusion is that developing a report that is interesting and informative to all stakeholders (and different social systems) while meeting the disclosure requirements of the standards is a challenge, and simplicity versus capturing the complexity is challenged by a Goldilocks effect. Most fundamental, however, is the question: does SASB/GRI (including SDG Compass) link to e.g., SDG Index or Social Progress Index?

2.4 Does SASB/GRI Link to the SDG or Social Progress Indices? And Are Semantics for Micro-economic Interventions Sufficient? According to Betti et al. (2018) SDG Compass is a guide with associated tools and knowledge resources to help companies align their business strategies with the SDGs to measuring and managing their contribution, including an inventory that maps more than 1500 existing business indicators against the 17 SDGs and their respective 169 targets. However, the SDGs are about “impact”, and in these measures the unit of analysis is not the company, but something outside of the company whose operations affect it, such as reduced gender inequality in a community or replenishment of fishing stocks. Many of the metrics in SASB and GRI are about a company’s operations and the impact must be inferred or further calculated, often based on data that lies outside the company’s control. Vörösmarty et al. (2018) propose a new approach to evaluate corporate products and services within broader environmental or human beneficiary settings, but true impact measurement is according to Betti et al. (2018) still at an early stage of development. Thus, we are still very far from a shared semantic reservoir concerning ESG and SDG measurements, and far from trusted measurements and reporting, and discovering companies’ impact is mainly a qualitative and time-consuming process. This may also impair the hope of changing investment patterns when the largest intergenerational wealth transfer in history is about to occur. Estimated over $30 trillion are to be inherited from baby boomers to millennials and Generation X across the next few decades, whiles Millennials’ earning power will also increase by almost 75% across the next few years (OpenInvest, 2021). Millennials are two times more likely to make sustainable investments as the average investor, but they also want more proof of performance (Morgan Stanley, 2017). Pucker (2021) also underlines, that market-forces alone cannot be expected to solve the huge gap to create a more sustainable world, structural changes are needed. In that sense, global warming is called the greatest market failure the world has ever seen. However, citing IMF, Pucker states that global subsidies for fossil fuels in 2017 were $5 trillion (about 6% if global GDP). Thus, far from the full costs of fossil fuels are in-calculated by the market. The current large subsidies for fossil fuels and for non-sustainable biofuels need to be switched toward a sustainable energy

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infrastructure, retrofitting buildings, R&D for sustainable solutions and carbon capture. Incentivizing taxations, repricing of resources as well as restrictive laws, are needed. Thus, Pucker (2021) argues, that micro-economic measures need to be supplemented by macro-economic measures, interventions, and regulation for structural changes to emerge. However, also measurements of macro-strategies are challenged. The hope has been for the Covid-19 recovery-packages to focus at “Build Back Better”1 macro-­ economic strategies (Schwab & Malleret, 2020). Thus, a question is, if recovery packages can spur a concerted transition for both public and private investments towards the SDGs. Vivid Economics (2021)2 has established a Greenness of Stimulus Index (GSI) covering the G20 plus 10 major economies. Since the start of the COVID-19 pandemic, governments from these countries have injected $17.2 trillion of public stimulus money into the global economy. Unfortunately, the July 2021 final edition of the GSI-index (Vivid Economics, 2021) shows that the stimulus packages have a net negative environmental impact in 20 of the 30 countries covered by the Greenness of Stimulus Index. Only 10.6% of Covid-19 stimulus funding from these major economies will have a positive impact on the environment.3

2.5 Conclusion As argued in this essay, the SDGs do not seem reachable until late in the twenty-first century with the current trajectory, and large crises seem to make it more difficult to reach the SDC’s, and not to provide a moment for a great reset as e.g., hoped for by the World Economic Forums Great Reset Agenda (Schwab & Malleret, 2020). The required course correction to achieve the SDGs by 2030 is very significant – about 10–15% of the world economy. However, even though it is a huge amount of money, it is not impossible. The SDGs are paradoxical, which need to be addressed to prioritize the goals, and shape projects that handles the paradoxes by addressing the need for large sustainability disruptions. As for now, only the market affirmative goals are making progress. Significant structural changes are needed through concerted public and private spending and investments, taxation, changes of price structures, regulations, scientific research, education etc. For such structural changes to emerge, rearranging of unsustainable structural couplings of social systems are needed, which need shared semantics, which as this essay has shown, is still lacking.

 A term oined in 2006 in the aftermath of the 2004 Asian tsunami, by 2015 the term “Building Back Better” was in widespread use by the Disaster Risk Reduction (DRR) community. 2  Since Marts 2021 part of McKincey & Co. 3  The infrastructure and budget reconciliation bills in the US negotiated in the fall 2021 are not included. 1

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Increased impact investments are needed. Carefully scientific, political, economic, health, educational etc. evaluated large-scale global impact projects may be a solution making it less time consuming for individual impact investors to make performance evaluations. Such projects need to be decided in global fora, and business models invented, that includes externalities in the return on investment – and provide an outcome incentive. This needs shared semantics that are not in place. We are still far from a shared semantic reservoir, and far from trusted measurements and reporting. Therefore, rearranging of unsustainable structural couplings and structural changes slow down. If such semantics are not put in place, we will jump from crisis to crisis: financial, pandemic, climate, migration etc.  - and not address the required systemic transition within the requested timeframe. The study underlines how measurements and reporting lack as a shared semantic reservoir, which makes it more difficult for various social systems to align in a more sustainable way, and providing the needed course correction – or with other words: it makes it easier to continue the present way for social systems to operate or to make a too slow course correction. The contribution of the research also illuminates the insufficient character of the standardization efforts and what is needed to socially construct the required shared semantic reservoir. Last, but not least, the research illuminates the disappointing news, that the large fiscal recovery investments related to Covid-recovery, have not provided the course-correction hoped for by e.g., the World Economic Forum’s Great Reset Agenda.

References Amel-Zadeh, A. (2018). Social responsibility in capital markets: A review and framework of theory and empirical evidence (working paper). Said Business School. Betti, G., Consolandi, C., & Eccles, R. G. (2018). The relationship between investor materiality and the sustainable development goals: A methodological framework. Sustainability, 10, 2248. Deloitte. (2020). 2020 Social progress index global findings. Retrieved https://www2.deloitte.com/ content/dam/Deloitte/cz/Documents/about-­deloitte/2020_Social_Progress_Index_global_ findings.pdf Eccles, R.  G., & Karbassi, L. (2018). The right way to support the sustainable development goals. MIT Sloan Management Review.. https://sloanreview.mit.edu/article/ the-­right-­way-­to-­support-­the-­unssustainable-­development-­goals Eccles, R. G., & Stroehle, J. C. (2018). Exploring social origins in the construction of ESG measures (working paper). Oxford University. Eccles, R.  G., Lee, L.-E., & Stroehle, J.  C. (2020). The social origins of ESG: An analysis of Innovest and KLD. Organization & Environment, 33(4), 575–596. Esty, D. C., & Lubin, D. A. (2020). Toward a next generation of corporate sustainability metrics. In D. C. Esty & T. Cort (Eds.), Values at work. Palgrave Macmillan. Global Reporting Initiative. (n.d.). Our mission and history. Retrieved October 23, 2021, https:// www.globalreporting.org/about-­gri/mission-­history/ GRI,SASB. (2021). A practical guide to sustainability reporting using GRI and SASB standards, produced by GRI and SASB with support from PWC, The impact management project, and climateworks foundation. Retrieved: https://globalreporting.org/media/mlkjpn1i/gri-­sasb-­joint-­ publication-­april-­2021.pdf

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Guillot, J. (2020). What is the connection between SASB and the SDGs?, SASB.org. Retrieved June 18, 2020, https://www.sasb.org/blog/what-­is-­the-­connection-­between-­sasb-­and-­the-­sdgs/ Hepburn, C., O’Callaghan, B., Stern, N., Stiglitz, J., & Zenghelis, D. (2020). Will COVID-19 fiscal recovery packages accelerate or retard progress on climate change? Oxford Review of Economic Policy, 36(Issue Supplement_1), S359–S381. Huck, W. (2019). Measuring sustainable development goals (SDGs) with indicators: Is legitimacy lacking?. Forthcoming. In M. Iovane, F. Palombino, D. Amoroso, & G. Zarra(Eds.), The protection of general interests in contemporary international law: A theoretical and empirical inquiry. Luhmann, N. (1995). Social systems. Stanford University Press. Luhmann, N. (2012). Theory of society, vol. 1. Stanford University Press. Luhmann, N. (2013). Theory of society, vol. 2. Stanford University Press. Macht, S., Chapman, R., & Fitzgerald, J. (2020). Postscript: COVID-19 and SDG progress. Journal of Management & Organization, 26(6), 1073–1076. MSCI ESG Research LLC. (2020, March). Swipe to invest: The story behind millennials and ESG investing. MSCI ESG Research LLC. Murillo, F., Charvet, E., Konya, K., & Ohno, I., Shiga, H. (2020). Scaling up business impact on the SDGs, policy brief under T20 Japan task force 1: 2030 agenda for sustainable development. G20 Insigths, the 2030 agenda and development cooperation, May 6, 2019. Retrieved: https://t20japan.org/policy-­brief-­scaling-­up-­business-­impact-­sdgs/ Neisig, M. (2017). Transition in complex polycentric contexts: Trusting and multifunctional semantics. Systems Research and Behavioral Science, 34(2), 163–181. Neisig, M. (2021a). Social systems theory and engaged scholarship: Co-designing a semantic reservoir in a polycentric network. Journal of Organizational Change Management., 34(4), 763–777. Neisig, M. (2021b). The circular economy: Rearranging structural couplings and the paradox of moral based sustainability-enhancing feedback, Kybernetes, preprint. Ng, A. W. (2019). Socially responsible investing in sustainable development. In W. L. Filho (Ed.), Encyclopedia of sustainability in higher education (pp. 3–5). Springer Nature. OpenInvest. (2021). $30T in inheritance moving to millennials: how to prepare your business for this great wealth transfer. OpenInvest, a Stanley Morgan Company. Published on June 3, 2021. Retrieved: https://www.openinvest.com/articles-­insights/30t-­in-­inheritance-­moving-­to-­ millennials-­how-­to-­prepare-­your-­business-­for-­this-­great-­wealth-­transfer Porter, M.E., Serafeim, G., & Kramer, M (2019, October 16). Where ESG Fails, Institutional Investor. Pucker, K.P. (2021). Overselling sustainability reporting: We’re confusing output with impact, Harvard Business Review, May–June 2021. Retrieved: https://hbr.org/2021/05/ overselling-­sustainability-­reporting# Sachs, D.  J., Kroll, C., Lafortune, G., Fuller, G., & Woelm, F. (2021). Sustainable development report 2021  - the decade of action for the sustainable development goals. Cambridge University Press. Schwab, K., & Malleret, T. (2020). The great reset. In World Economic Forum: Geneva. Social Progress Imperative. (2020). 2020 social Progress index. Social Progress Imperative. Available at: www.socialprogress.org Social Progress Imperative. (n.d.). The global agenda requires rigorous measurement: The contribution of the social progress index to the 2030 Agenda. Retrieved: https://www.socialprogress. org/static/e9c5d84be973bd5e2a9aa213854d381e/contribution-­of-­spi-­to-­2030-­agenda.pdf Stanley, M. (2017, August 9). Millennials drive growth in sustainable investing, Morgan Stanley, Institute for Sustainable Investing. Retrieved: https://www.morganstanley.com/ideas/ sustainable-­socially-­responsible-­investing-­millennials-­drive-­growth Vivid Economics. (2021, July). Greenness of stimulus index – An assessment of COVID-19 stimulus by G20 countries and other major economies in relation to climate action and biodiversity goals. Vivid Economics and Finance for Biodiversity Iniciative. Retrieved: https://www.

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vivideconomics.com/wp-­content/uploads/2021/07/Green-­Stimulus-­Index-­6th-­Edition_final-­ report.pdf Vörösmarty, C. J., Rodríguez Osuna, V., Koehler, D. A., Klop, P., Spengler, J. D., Buonocore, J. J., Cak, A. D., Tessler, Z. D., Corsi, F., Green, P. A., et al. (2018). Scientifically assess impacts of sustainable investments. Science, 359, 523–525. World Bank. (2021). World Bank national accounts data, and OECD National Accounts data files. Retrieved October 2, 2021, https://data.worldbank.org/indicator/NY.GDP.MKTP.CD World Economic Forum. Margit Neisig is Assoc. Prof. of Management and Leadership at Roskilde University in Denmark, where she is heading the business programs.  She is publishing in academic journals such as,  Kybernetes, Systems Research and Behavioral Science, Journal of Organizational Change Management, Nordic Journal of Studies in Educational Policy as well as has chapters in several peer-reviewed edited volumes and encyclopedias. She is an active member of academic organizations such as the European Academy of Management, and regularly attending the Luhmann Conference series – Observing social systems, at the Inter-University Centre (IUC) Further, she has many years of management and leadership experience within both the public and private sectors.  

Chapter 3

Definition and Measurement of Sustainability and CSR: Circumstances of Perceptual Misalignments Kristian J. Sund

Abstract  Corporate responsibility (CSR) measurement is intimately linked to CSR definition, and the same can be said of sustainability. Yet, there is no universal definition of what constitutes responsible and irresponsible, or sustainable and unsustainable, corporate action. Furthermore, perceptions of what is important to measure as part of CSR and sustainability reporting differ across both internal and external stakeholders. What are the circumstances and consequences of differences in the perception of definition and measurement between internal and external stakeholders? In this short essay I discuss this question and propose four possible circumstances that firms (and indeed researchers) could face when dealing with CSR and sustainability measurement. I refer to these as circumstances of definitional and/or empirical perceptual misalignments.

3.1 Introduction Corporate responsibility and sustainability reporting and measurement has as long a history as non-financial reporting in general. This is because information concerning environmental, social, economic, and governance issues in the broadest sense, have been reported to stakeholders, formally or informally, for as long as corporations have existed. The firm is thus best viewed as an open system, in constant interaction with its environment, and as such non-financial information flows regularly in and out of the firm (Bourgeois III, 1980). The formalization of such reporting is a more recent phenomenon. From an early focus on formalized environmental reporting, as well as associated quality management systems such as ISO14000, firms moved into broader CSR reporting. Within the European Union, EU Directive 2014/95/EU was introduced in 2016, now making CSR reporting mandatory for K. J. Sund (*) Department of Social Sciences and Business, Roskilde University, Roskilde, Denmark e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Kacanski et al. (eds.), Measuring Sustainability and CSR: From Reporting to Decision-Making, Ethical Economy 64, https://doi.org/10.1007/978-3-031-26959-2_3

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companies with over 500 employees. Today, many (especially larger) firms issue multiple yearly reports. For example, food giant Nestlé among other publishes an annual report, a governance report, and a CSR report, the latter under the title “Creating Shared Value and Sustainability”, a clear reference to the ideas of shared value of Mark Kramer, Michael Porter, and others (Porter & Kramer, 2006). In fact, Nestlé explicitly collaborated with these academics and adopted the creating shared value framework (Koep, 2017). Taking the example of Nestlé a step further, their reporting reveals that they apply a specific and explicit definition to the idea of corporate responsibility. Their empirical reporting appears extensive, and they make further explicit references to both Sustainable Development Goals (SDG) and to ESG measurements. They report that their 2021 ESG score rated by FTSE4Good was 4.7 out of 5, and by MSCI an AA score, putting them in the top 20% of their sector. They thus appear to be relative champions of corporate responsibility and sustainability, in intentions, actions, and reporting. Yet, they have also been fairly systematically criticized for some of their products not being sustainable, especially in reference to Nespresso capsules (Hamann et al., 2014). They have also (along with other multinational corporations) been criticized for imposing their own definitions of sustainability and CSR that in turn legitimize their economic actions. Jallow (2009, p.  523) for example writes about their “Commitment to Africa” report that “Nestlé is forming a view about what constitutes sustainable development in Africa and how it sees its role in delivering its commitment. This tends to create the impression (for Nestlé stakeholders) that Nestlé is in a position to deliver sustainable development in its role as corporate citizen by a ‘business as usual’ approach, where social commitments are part of an economic programme of delivering added value in social and economic terms.” Perhaps it should not be surprising that even a firm that has developed a clear definition of its CSR and sustainability, and associated extensive empirical reporting, could face criticism. There are after all inherent tensions in CSR reporting, between future-oriented ambitions and goals, and past-oriented reporting (Koep, 2017). Broader forward-looking statements of corporate aspirations – the visions regarding responsibility and sustainability – most likely will not be directly backed up by the much narrower reviews of past performance that are reported publicly. This leaves the firm open to critique. Furthermore, managers are information workers, perceiving and interpreting the external environment on behalf of the firm (Daft & Weick, 1984; Sund, 2013, 2015). As managers try to make sense of their responsibilities and of the notion of sustainability, their definition (i.e., sensemaking) will likely change over time, and thus also their reporting focus. A further issue is that different managers will interpret the external environment of the firm differently, and these interpretations will not necessarily coincide with the interpretations of external stakeholders (Egfjord & Sund, 2020). Internal and external stakeholders will inevitably perceive things differently. Finally, both internal managers and external stakeholders are subject to cognitive biases and to incorrect perceptions, not helped by the uncertainty that may surround relatively ill-defined concepts such as responsibility and sustainability, such that stakeholders both internal and external to the firm may misperceive reality (Doty et  al., 2006; Huff et  al., 2016; Mezias &

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Starbuck, 2003; Sund, 2016; Sund et al., 2022; Sutcliffe, 1994). A final consideration is that different stakeholders may have an interest in framing the CSR of a particular firm in different ways, leading to a contest of competing frames (Kaplan, 2008; Sund & Anson, 2021). In the next section, I will propose a simple framework to help conceptualize different circumstances of agreement surrounding CSR and sustainability definition and measurement (reporting). I will then briefly comment on the inevitability of disagreements, leading me to conclude that firms cannot hope to ever escape criticism.

3.2 Circumstances of Perceptual Misalignments Corporate responsibility and sustainability definitions and measurements may be the subject of perceptual misalignments between different stakeholders. Such misalignments can be internal in the firm but are more likely to be between the firm and its external stakeholders, or between different external stakeholders. Given my earlier discussion, it may be inevitable for such misalignments to appear. They can usefully be categorized into four types of circumstances, as indicated in Table 3.1. The first type of circumstance is that in which there is a mismatch between the perceptions of internal and external stakeholders (or indeed between different external stakeholders) regarding both the definition and measurement. What is defined as responsible corporate behaviour will ultimately influence what is later measured (Pérez & Rodríguez del Bosque, 2013). The same can be said for the definition of what constitutes sustainable development and corporate actions. If stakeholders already disagree on the definition of what actions would be responsible and sustainable, the likelihood of also disagreeing on what should be measured appears greater. However, it is important here to note that it is misalignments of perceptions, rather than any objective truth that will lead to problems. After all, in the context of the large multinational firm there may not be any single objectively superior definition of responsibility (see for example the academic literature on the links between national culture and CSR, Zyglidopoulos (2002)), but rather differences in perceptions. The second circumstance is that in which stakeholders have aligned their perceptions of what social responsibility and sustainability is, but there is misalignment concerning measurement. The problem is an empirical one. This could happen if the firm omits to measure important variables, if data quality is insufficient, or indeed if Table 3.1  Definitional and measurement agreement Low level of agreement on definition Low level of agreement on A. both definitional and measurement empirical misalignments High level of agreement on C. Perceptual misalignment: measurement Definitional problem

High level of agreement on definition B. Perceptual misalignment: Empirical problem D. Perceptions aligned

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stakeholders fail to understand the data actually reported by the firm. In such circumstances, external stakeholders may demand more transparency or try to influence the firm to divulge particular information. It is even possible that stakeholders try to change the actions of the firm. A good example of a case in which perceptions appeared to be misaligned is the famous Brent Spar case, which has been described as a case of responsibility communication gone wrong (Löfstedt & Renn, 1997). Arguably one strategy could be for firms to simplify and standardize measurement, for example through common industry standards, or through standardized rating systems such as the ESG ratings of various ESG rating agencies (e.g., Sustainalytics, MSCI, Bloomberg, Moody’s). This has been the approach of many large firms and has the advantage of legitimizing the firm’s measurements. To the extent that both internal and external stakeholders trust whatever measurement standard the firm adopts, and perceive the standard to be relevant, the approach could serve to align perceptions (moving the firm into quadrant D in Table 3.1). A third circumstance, that at first glance appears only theoretical, is that where perceptions of definition are misaligned, despite agreements on measurement and reporting. In this situation, there is a definitional problem, rather than a measurement one. This would seem unrealistic if, as earlier discussed, we assume that definition precedes measurement. However, in the case of very specific products, such as the Nespresso capsule example, a firm may find that stakeholders disagree over the very definition of what constitutes sustainable actions. Nestlé defines their aluminium-­ based product as very sustainable given that the material is almost 100% recyclable. Criticism emerged early on that this doesn’t help if the capsules in reality end up in landfills. The disagreement seems to be more about the definition of the firm’s responsibility, rather than what or how to measure. For example, is it the firm’s responsibility to ensure that its products are recycled, and should it thus take responsibility from cradle to grave, or is it sufficient to ensure the product is recyclable, and then entrust public authorities and consumers with the task of getting it done? I have defined this as a definitional problem. A solution often seen is for public authorities to define by law what constitutes responsible action. However, industry collaborations can also take onboard this responsibility. For example, in Switzerland the Swico Recycling system has been in operation since 1994, a voluntary system set up by manufacturers and importers of consumer electronics, allowing consumers to deliver electronics of all kinds back to retailers and manufacturers for free recycling. If stakeholders can agree on such systems, it can serve to align their perceptions of what constitutes a responsible and sustainable handling of electronic or other waste. A final circumstance is that in which perceptions regarding both definition and measurement are aligned. In such a circumstance the firm would appear by external stakeholders to be both credible and socially responsible, or at least to be moving in a direction of increased transparency regarding their responsibility and sustainability.

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3.3 Concluding Comments Due to a constantly changing environment, new products being introduced, and the many other changes surrounding the firm, both the definition and measurement of corporate responsibility and sustainability can be expected to constantly change as well. As such, a state of perfect perceptual alignment between stakeholders is unlikely to be durable. A given firm should expect to be confronted with episodes of both definitional and measurement problems, as previously described. Viewed from this angle, firms must develop strategies for managing perceptual misalignments. For example, firms can work closely with industry associations and standards agencies to develop a consensus on how best to measure environmental impacts. For scholars studying CSR and corporate sustainability, the problem is different. They have to recognize that various stakeholders’ cognitions, with their inherent biases and differences of interpretation, are what they often capture in their research, and these perceptions may be grossly inaccurate (see e.g., the discussions of managerial misperceptions of Mezias & Starbuck, 2003, and Sund, 2016). Thus, scholars simply pointing out and trying to theorize based on particular short-term cases of apparent irresponsibility, if and when such cases are actually just circumstances of perceptual misalignments, is at best misguided, at worst downright unscientific. Put differently, measuring the degree of responsibility is as much subject to both definitional and measurement problems for the scholar, as it is for firms and their various stakeholders.

References Bourgeois, L.  J., III. (1980). Strategy and environment: A conceptual integration. Academy of Management Review, 5(1), 25–39. Daft, R. L., & Weick, K. E. (1984). Toward a model of organizations as interpretation systems. Academy of Management Review, 9(2), 284–295. Doty, D. H., Bhattacharya, M., Wheatley, K. K., & Sutcliffe, K. M. (2006). Divergence between informant and archival measures of the environment: Real differences, artifact, or perceptual error? Journal of Business Research, 59(2), 268–277. Egfjord, K.  F. H., & Sund, K.  J. (2020). Do you see what I see? How differing perceptions of the environment can hinder radical business model innovation. Technological Forecasting and Social Change, 150, 119787. Hamann, L., Luschnat, K., Niemuth, S., Smolarz, P., & Golombek, S. (2014). CSR in the coffee industry: Sustainability issues at Nestlé-Nespresso and Starbucks. Journal of European Management & Public Affairs Studies, 2(1), 31–35. Huff, A. S., Miliken, F. J., Hodgkinson, G. P., Galavan, R. J., & Sund, K. J. (2016). A conversation on uncertainty on managerial and organization cognition. In K. J. Sund, R. J. Galavan, & A. S. Huff (Eds.), Uncertainty and strategic decision making (pp. 1–31). Emerald Group Publishing. Jallow, K. (2009). Nestlé as corporate citizen: A critique of its commitment to Africa report. Social Responsibility Journal, 5(4), 512–524. Kaplan, S. (2008). Framing contests: Strategy making under uncertainty. Organization Science, 19(5), 729–752.

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Koep, L. (2017). Tensions in aspirational CSR communication—A longitudinal investigation of CSR reporting. Sustainability, 9(12), 2202. Löfstedt, R. E., & Renn, O. (1997). The Brent spar controversy: An example of risk communication gone wrong. Risk Analysis, 17(2), 131–136. Mezias, J.  M., & Starbuck, W.  H. (2003). Studying the accuracy of managers’ perceptions: A research odyssey. British Journal of Management, 14(1), 3–17. Pérez, A., & Rodríguez del Bosque, I. (2013). Measuring CSR image: Three studies to develop and to validate a reliable measurement tool. Journal of Business Ethics, 118(2), 265–286. Porter, M. E., & Kramer, M. R. (2006). The link between competitive advantage and corporate social responsibility. Harvard Business Review, 84(12), 78–92. Sund, K. J. (2013). Scanning, perceived uncertainty, and the interpretation of trends: A study of hotel directors’ interpretation of demographic change. International Journal of Hospitality Management, 33, 294–303. Sund, K.  J. (2015). Revisiting organizational interpretation and three types of uncertainty. International Journal of Organizational Analysis, 23(4), 588–605. Sund, K. J. (2016). A test of perceptual accuracy and overconfidence in a strategic issue context. In Uncertainty and strategic decision making (new horizons in managerial and organizational cognition) (pp. 101–126). Emerald Group Publishing Limited. Sund, K. J., & Anson, J. (2021). The decline of mail: Postal industry decision-makers’ interpretations in the aftermath of the financial crisis. Entreprises et Histoire, 105(4), 65–77. Sund, K. J., Galavan, R., & Huff, A. (2022). Uncertainty in strategy research. In M. A. Griffin & G. Grote (Eds.), The Oxford handbook of uncertainty Management in Work Organizations (pp. C3.S1–C3.S7). Oxford university press. Sutcliffe, K. M. (1994). What executives notice: Accurate perceptions in top management teams. Academy of Management Journal, 37(5), 1360–1378. Zyglidopoulos, S.  C. (2002). The social and environmental responsibilities of multinationals: Evidence from the Brent spar case. Journal of Business Ethics, 36(1), 141–151. Kristian J. Sund is Professor of Strategic Management at Roskilde University in Denmark. He holds a Doctorate in Management and Licentiate (M.Sc.) in Economics from the University of Lausanne, and a M.A. from the Ecole Polytechnique Fédérale de Lausanne (EPFL), where he also completed his post-doc.  

Chapter 4

“What I Say Is Not Necessarily What I Do”: A Critical Conceptual Analysis of the (Missing) Link between Corporate Sustainability Reporting and Social Impact Riccardo Torelli

Abstract  When terms such as sustainability, sustainable development, UN Agenda 2030 are mentioned, they refer to certain commitments by different categories of social actors (including companies), which should limit the negative impacts on the economy, people and the environment and create a certain social impact. In this regard, it is pointed out that the very concept of social impact often remains very distant from the commitments made and communicated by companies in their reports and even more so from what companies actually do. This critical conceptual analysis aims to discuss and overcome the thesis that the more one talks about a topic, the more others will know about it and deal with it. Today’s social and environmental reporting practices are often very distant from the real ability to capture the true and concrete potential to create social impact and to create opportunities for improvement towards a more sustainable context.

4.1 Introduction The publication of a sustainability report, or CSR report or integrated report, is no longer a news. It is an established and almost pervasive phenomenon, potentially providing useful non-financial information to different stakeholder groups (Balluchi et al. 2020a). However, the practices adopted by some companies risk not only providing limited information or poor quality information, but also distorting stakeholders’ perceptions and thus their subsequent actions and choices (Torelli et al., 2020). Phenomena such as greenwashing (Lyon & Montgomery, 2015; Seele & R. Torelli (*) Department of Economic and Social Sciences, Università Cattolica del Sacro Coure, Piacenza, Italy e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Kacanski et al. (eds.), Measuring Sustainability and CSR: From Reporting to Decision-Making, Ethical Economy 64, https://doi.org/10.1007/978-3-031-26959-2_4

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Gatti, 2017; Testa et  al., 2018) (and its brothers bluewashing, rainbowwashing, etc.), impression management (Hooghiemstra, 2000) and organised hypocrisy (Brunsson, 2002; Maroun et al., 2018; She & Michelon, 2018; Wagner et al., 2009) are some of the most important and present types of negative strategies and actions related to corporate sustainability reporting. These behaviours create the basis for a serious decoupling between what is reported and measured by companies in these reports and what companies are actually doing or planning to do (Brunton et al., 2017; Orazi & Chan, 2018; Schoeneborn et al., 2019). This is extremely important as it increases the risk of growing the information asymmetry that already exists between companies and stakeholders. Moreover, if we look further and analyse the impact that these companies are having or will have in social, environmental and economic terms, we encounter a further critical point, worthy of further empirical and conceptual investigation. When terms such as sustainability, sustainable development, Agenda 2030 are mentioned, they refer to certain commitments by different categories of social actors (including companies), which should limit the negative impacts on the economy, people and the environment and create a certain social impact (Burdge & Vanclay, 1996; Latané, 1981; Stevens & Kanie, 2016). In this regard, it is pointed out that the very concept of social impact often remains very distant from the commitments made and communicated by companies in their reports and even more so from what companies actually do. This critical conceptual analysis aims to overcome the thesis that the more one talks about a topic, the more others will know about it and deal with it (in the field of corporate CSR after years of non-financial communication this thesis is no longer supportable). In the discussion of the paper we intend to focus on how today’s social and environmental reporting practices are often very distant from the real ability to capture the true and concrete potential to create social impact and to create opportunities for improvement towards a more sustainable context.

4.2 Social Environmental Reporting and Value Creation The value-creating capacity of CSR and sustainability-oriented strategies/practices is often the victim of an oversimplification and limitation that leads on one hand to link the concept of CSR with that of financial performance and on the other hand to link it with the concept of Social Environmental Reporting (SER). By now, a considerable, and perhaps excessive, number of studies have investigated, from different points of view and with different focuses, how the implementation of CSR practices, strategies and/or actions are determined by a certain profitability or company size, and even more so how they lead to an improvement in financial results (Boesso & Kumar, 2009; Cormier & Magnan, 1999; da Silva Monteiro & Aibar-­ Guzmán, 2010; Moneva & Ortas, 2008; Richardson & Welker, 2001; Walker & Wan, 2012). If from this point of view we are witnessing a forced impoverishment of the very concept of CSR, which by its very nature tends to go beyond the simple boundaries of the economic/financial sphere, on the other hand the main stream

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discussion leads to make the real actions towards the benefit of stakeholders, community, environment, and oriented to the creation of shared value, almost coincide with the practices of communicating commitments (real, presumed or false). It is quite clear that the potential value (in a broad sense, not only economic) created by an albeit complex communication and reporting practice is quite different from a real substantial action able of generating impacts and change inside and outside the company. In this sense, it is necessary to reflect on the ability to create shared value and social impact by any practice related to CSR or more generally to the sphere of sustainability (Gray, 2006). This is a considerable effort of analysis as the possible situations are many: for example, we have CSR actions able by their very nature of creating positive and significant impacts regardless of the collateral action of communication that may or may not be carried out. On the other hand, we may find ourselves evaluating CSR actions in which the SER plays a key role in activating the effects, i.e. cases in which only through the knowledge of what the company is doing can start a mechanisms of creation and above all of fruition, sharing and enjoyment of the value activated. Lastly, we have situations in which the (almost) sole communication of commitments related to the social and environmental sphere by a company is capable of setting in motion virtuous mechanisms both within the company itself and externally towards other companies in the industry, or also towards institutions. In the face of this, it is even more important to ask and investigate how much SER is potentially capable of creating value, and consequently to consider how much it is appropriate to invest different types of resources in this communication practices, taking them away from other actions, including the substantive actions of social and environmental responsibility (Ahmed & Anifowose, 2016; Michelon et al., 2015; Miras-Rodríguez et al., 2020; Walker & Wan, 2012).

4.3 The Dual Role of Reporting: Representative and Formative The vision of SER practices as a mere communicative representation or as an integral part of CSR processes and creation of shared value and social impacts is a subject of research and investigation. In the paper by Schoeneborn et  al. (2019) these different visions are analysed in detail and defined respectively as representational view and formative view. In the first view, defined by the authors as ‘walking the talk’, substantial CSR actions, processes and strategies are hierarchically superior to their communication and guide the whole process. The aim of the SER in this case is to enable internal and external stakeholders to know (and thus reduce the information asymmetry that would otherwise inevitably exist) what the company has done and will do in terms of responsibility and sustainability. It is a role that also aims at obtaining legitimacy, reputation and trust by the market, institutions and all stakeholders interested in and, above all, positively impacted by the company’s behaviors (Cho & Patten, 2007; Cormier & Magnan, 2015; Guthrie & Parker, 1989;

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Lai et al., 2016). When looking at the SER from this point of view (representative), it is fundamental to understand how much the communication and reporting is adherent and coincident with what actually exists or is in the plans for the future. This is a problem of possible decoupling between substantial actions and symbolic actions, which is sometimes deliberately put in place trying to achieve or consolidate a higher level of legitimacy and reputation than what would have been achieved through substantive actions (Walker & Wan, 2012). Or it could be an attempt to force and distort stakeholders’ perceptions through practices that can be traced back to greenwashing, able to create a new positive typology of communication about a given set of actions and commitments (Torelli et al., 2020). If, on the other hand, SER is seen as an educational process, it has three possible roles in relation to substantial CSR actions (Schoeneborn et al., 2019). The first role (walking to talk) sees the SER as the correct conclusion of a substantial process with the important role of giving a sense of completeness to the CSR processes implemented by going into detail and discussing what has been done. In the second possible role (talking to walk) the SER represents the first step of the process, a sort of aspirational plan and orientation for future actions, a path to follow. In the third role (t(w)alking) the SER and the substantive CSR practices go hand in hand creating an inseparable and self-­ sustaining union. In this classification, the different possible relationships between CSR actions and SER are analysed, focusing on their relationship and causal (as well as temporal and hierarchical) links. However, the concept of social impact escapes from this in-depth analysis: here sustainability communication has a clear role in relation to empirical processes aimed at socio-environmental responsibility but seems to be able only to influence internal processes and the external view of company image (or its perception) (Aras & Crowther, 2008; Bowrey & Clements, 2019; Colin Higgins et al., 2014).

4.4 Substantive Actions and Symbolic Communications: The Role of Transparency A key role in defining the relationship between SER and substantive CSR actions is played by the normative, cultural and market context in relation to non-financial reporting practices. Haack et al. (2021) define a context characterised by transparency in the logic of dissemination of information and a different context characterised by opacity in communication between the different actors. The reference literature identifies these two contexts as both favorable to the adoption of substantial practices capable of having a social impact (Haack et al., 2021). The first one, the transparency perspective, offers space to improve and incentivize substantive CSR actions as reducing the information asymmetry between the parties and creating a clear, understandable and complete information flow. It could encourage companies to implement virtuous behaviors and strategies in order to respond to stakeholders’ needs and information requirements and to maintain their legitimacy

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in the market (Fernandez-Feijoo et al., 2014). A competitive contest in relation to the quality and quantity of public socio-environmental information also encourages stakeholders themselves to ask with more determination and more attention information about the companies’ behaviours, leading in time to a rooting of these practices and therefore to an increase in companies’ sensitivity towards substantial CSR practices (Burchell & Cook, 2006). On the other hand in the opacity perspective there is a positive evaluation of the lack of transparency as a factor stimulating substantive practices. This is due to the fact that the lack of clear and accessible information does not allow stakeholders to understand what companies are doing and the impacts they have but at the same time does not push companies to engage in communication practices as a priority, but rather in substantive practices. Proponents of this framework argue that this perspective leaves time for ‘ceremonial adopters’ to change their approach and improve their strategic and organisational processes towards more sustainable behaviour and impacts (Haack et al., 2021). In this perspective also the role of regulation and institutions is seen as potentially limiting if oriented towards the imposition of merely communicative and reporting practices that could also attract an important part of resources towards the pursuit of regulatory compliance rather than towards the creation of practices of change towards a path of responsibility.

4.5 Rules/Goals Decoupling Regulation about sustainability and CSR communications and performance is part of a distorting and counterproductive decoupling mechanism that Bromley and Powell (2012) divide into two phases: the decoupling between Policies and Practices and the decoupling between Means and Ends. The first type of decoupling directly concerns the lack of connection between the regulations that a company should respect and the practices it implements. For example, it concerns situations in which the company does not comply with certain regulations or laws, and in which it does not implement practices and actions aimed at complying with certain standards or legislator’s requests. In the second type, there is no link between the actions taken and the objectives that were intended to be achieved. These are cases where the objective of a set of practices is not clear and understandable, or where the set of objectives that the company aims to achieve through the strategies created is not directly understandable. In the latter case the issue of unnecessary expenditure of resources to plan and carry out actions without a direct link to the achievement of previously set goals comes into play (Brunton et al., 2017). In this context it is evident how the question of the SER comes into play: its active role is present both in the decoupling between policy and practice and in that between means and ends. In the first case, we are faced with illegal communications aimed at hiding the lack of compliance with rules, regulations and standards required, while in the second case, CSR communication can be used to underline the goodness of the strategic and operational choices made and to clarify the set of goals that the company has set

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itself (Balluchi et al. 2020b). In recent years, however, also due to strong pressure from governments, international institutions and NGOs, which have on the one hand created growing expectations in stakeholders and on the other structured regulatory requirements (see the EU directive on non-financial reporting) or detailed frameworks related to sustainability performance (see for example the UN Agenda 2030), a new type of wider decoupling is being defined. This is the lack of linkage between CSR rules (be they laws, regulations, standards, etc.) and the final goals. Within this broad decoupling, the SER is used for various purposes and in different ways. It can be used to communicate the presence of a positive response to regulatory or stakeholder requests when in truth the objectives that the company has set are not consistent (Balluchi et al. 2020b). It can be used also to try to ‘embellish’ the CSR processes of the company and influence the perceptions of the stakeholders who receive these communications so that they could read these processes as totally adherent to the demands that have been made to the company and thus create a legitimization of the objectives that the company seems to have set (Hooghiemstra, 2000). Ultimately, there is a twofold possible role: to legitimize practices by communicating that they are consistent with the imposed policies (practice legitimating SER) or to legitimize the goals that the company has set by communicating that these are in line with the requests made to the company (goals legitimating SER). In both cases, the wide-ranging ‘Policy-Goals’ decoupling undermines the potential effect of creating or enhancing social impact that the SER could have. As there is a break and distortion between what the company is required to do to be a sustainable and responsible actor and the real goals it has set, the positive social impact is drastically eroded and limited. In this scenario, a second type of misalignment also emerges, i.e. between socio-environmental communication and the creation of shared value or, in any case, support for the creation of social impact and the satisfaction of the needs and requests (informative and substantial) of all stakeholders (Gray, 2006).

4.6 Final Reflections Because of the ‘Communication-Impact’ decoupling, at the basis of the critical reasoning developed in this paper, practices have been developed with different motivations and methods of communication and reporting that have nothing to do with the creation of shared value but attempt to change external perceptions of what the company has done, is doing or will do (Brunton et al., 2017). These practices therefore fall within the macro-phenomenon of greenwashing (or similar phenomena, depending on whether they are about social issues, the SDGs or other), characterised by the deceptive nature of the SER (Walker & Wan, 2012). From being a potential information tool or even a tool for encouraging good practices, it has become a tool for misinformation and deception. The virtuous link between SER and social impact can only be reconstituted with a clear vision of its own sustainability goals and with a continuous and direct line from compliance with regulations, stakeholder

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requests and reference standards/frameworks to the achievement of a coherent social impact aligned with the practices, strategies, processes and actions implemented. In this virtuous perspective, communication on CSR and sustainability processes can play an important role that goes beyond the mere resolution of the natural information asymmetry and that can trigger processes of creation of best practices that can be emulated, of increase of stakeholders’ expectations, of spur towards the legislator, of push to non-virtuous competitors. In this way, the SER would not only go hand in hand with substantial actions towards the creation of a social impact and shared value, but would itself be a potential creator of positive impacts and would acquire its own dignity as well as a role of fundamental importance. The relegation of non-financial communication practices to an action of persuasion, mere compliance with policies or embellishment of the corporate image and reputation does not trigger the mechanism of activation of the SER as a creator of value, but rather becomes a potential instrument for the destruction of value in the long term (Miras-­ Rodríguez et al., 2020).

4.7 Conclusion It becomes necessary to identify possible tools to rebuild that union between communication and what is done. To this end, the ethical-moral values of management are of extreme importance, capable of guiding those responsible for communication towards correct and non-deceptive practices. However, it is not possible to rely solely on people’s goodwill and personal inclination. Action must therefore be taken with regard to socio-environmental communication and some possibilities can be considered: (1) the control, even on a random basis and not every year, of companies’ sustainability reports by a public body or by a private body/professional not selected by the company itself that substantively (and not only formally) verifies the information communicated; (2) the monitoring, through triangulation of information, of the communication of the most controversial companies or companies at risk of greenwashing by associations or NGOs, supported for these actions by central administrations; (3) the promotion and operational support to possible notifications of suspected cases of misleading communication by individual citizens, competing companies, other actors of the supply chain, in particular through digital, anonymous and user-friendly systems. In the light of the critical reflections set out in this paper, it is clear that the relationship between what a company does and what a company communicates is increasingly unclear and not transparent, and even more so the relationship between communication processes and the actual creation of shared value. It is therefore necessary to address the issue with a perspective and a vision aimed at transforming the reporting process into something concrete and transformative. Able not only of making virtuous actions visible but also of being a vehicle for a sustainable change.

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Wagner, T., Lutz, R. J., & Weitz, B. A. (2009). Corporate hypocrisy: Overcoming the threat of inconsistent corporate social responsibility perceptions. Journal of Marketing, 73(6), 77–91. https://doi.org/10/b9b2xj Walker, K., & Wan, F. (2012). The harm of symbolic actions and green-washing: Corporate actions and communications on environmental performance and their financial implications. Journal of Business Ethics, 109(2), 227–242. https://doi.org/10.1007/s10551-­011-­1122-­4 Riccardo Torelli, Ph.D. is a research fellow in Business Sustainability and Ethics and Adjunct Professor of Corporate Social Responsibility and Strategies for sustainable business at the Department of Economic and Social Sciences (Faculty of Business and Law) of Università Cattolica del Sacro Cuore (Piacenza - Italy). His research focuses on corporate sustainability and SDGs, CSR, business ethics, greenwashing and non-financial reporting. He is member of Centre for Social and Environmental Accounting Research (CSEAR), European Business Ethics Network (EBEN), and Associate Editor of Corporate Social Responsibility and Environmental Management journal and of Journal of Public Affairs. He has published several international contributions, in particular in Journal of Business Ethics, Business Strategy and the Environment, Corporate Social Responsibility and Environmental Management, Journal of Cleaner Production, Sustainability and in some Springer edited books.  

Chapter 5

Blended Finance and the SDGs: Using the Spectrum of Capital to de-Risk Business Model Transformation Vanina Farber

and Patrick Reichert

Abstract  The longstanding debate of whether environmental, social and governance (ESG) issues impact financial performance appears to have given way to identifying the best way for firms to achieve long-term sustainability. In this essay, we suggest that overlaying ESG issues with the United Nations’ Sustainable Development Goals (SDGs) provides an avenue for firms to transition to sustainable business models. To this end, the pursuit of sustainable opportunities via blended finance, mechanisms whereby the private sector, nonprofits and public actors work together in an effort to tackle the most pressing global challenges, could help to de-­ risk private sector involvement in sustainable development. We argue that de-­risking occurs through three mechanisms: (1) identification of material ESG issues for firms, (2) the use of subsidy via blended finance instruments, and (3) trust brokering from civil society and public sector actors. Through two illustrative case studies, we identify the challenges and opportunities of blended finance to serve as a tool to meet Agenda 2030.

5.1 Introduction An increasing number of firms have recently committed to disclosing sustainability information (Green & Cheng, 2019). While such information was rarely disclosed in the early 2000s, it has now become common practice for firms to adopt various environmental, social, and governance (ESG) initiatives—often grouped under the umbrella of “corporate social responsibility” (CSR) (Hillman & Keim, 2001)—in response to growing institutional pressures for responsible practices, community involvement, increased transparency, higher labor standards, reduced greenhouse

V. Farber (*) · P. Reichert International Institute for Management Development (IMD), Lausanne, Switzerland e-mail: [email protected]; [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Kacanski et al. (eds.), Measuring Sustainability and CSR: From Reporting to Decision-Making, Ethical Economy 64, https://doi.org/10.1007/978-3-031-26959-2_5

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gas emissions, and numerous other social and environmental causes (Campbell, 2007; Waddock, 2008; Hawn & Ioannou, 2016). Much of this pressure has stemmed from stakeholder groups, in particular non-governmental organizations (NGOs) (Reid & Toffel, 2009), tighter public regulation (Grewal et al., 2019), and investor interest in ESG data (Eccles et al., 2011). Although the disclosure of ESG information is becoming mainstreamed, the transition towards sustainable business models has been incremental and many companies find it difficult to meet ESG targets. For example, despite 20 years of industry promises from chocolate companies, human rights abuses such as child labor continue to plague cacao supply chains.1 Similar failures persist on environmental pledges to stop deforestation across industries including cattle, palm oil, soy, timber and rubber.2 These delays are problematic. As consensus builds around global sustainability targets and frameworks, the private sector will need to play an integral role. Formally adopted by the United Nations in 2015, the 17 Sustainable Development Goals (SDGs), and 169 sub-targets, have been described as “the closest thing the Earth has to a strategy” (PwC, 2017). It is widely acknowledged that achievement of the SDG objectives by the 2030 target will require support from the private sector (Betti et al., 2018). In this essay, we highlight the promising role of blended finance to help firms de-risk the sustainability transition. We suggest that de-risking occurs through three mechanisms: (1) identification of material ESG issues for firms, (2) subsidy via the use of blended finance facilities, and (3) trust brokering from civil society and the public sector. Our overarching thesis is that finance provides a common language for stakeholders to structure partnerships that identify and scale social innovations attempting to deliver on Agenda 2030. In the next section, we provide an overview of SDGs and the need for private sector finance. We then examine each of the three mechanisms and use two illustrative cases to demonstrate the divergent strategies that firms can employ to implement a blended finance facility. We finish with a brief conclusion.

5.2 Sustainable Development Goals The 2030 Agenda has expanded the number and diversity of financial actors called upon to advance sustainable development. Nevertheless, although development finance institutions and private investors (e.g., impact investing funds) have engaged in blending facilities, institutional investors and corporations have largely been absent from the type of borderline investment opportunities addressed by blended  https://www.washingtonpost.com/graphics/2019/business/hershey-nestle-marschocolate-child-labor-west-africa/ 2  https://www.forest-trends.org/publications/commitments-in-action-corporate-tellsfor-financing-forest-conservation-restoration-2020/ 1

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finance (Halland et al., 2018). Understanding ways to crowd-in these actors is at the center of the debate around the “additionality” of blended finance; that is, how public and nonprofit actors create financing opportunities that are attractive to private investors but would otherwise go unfunded due to perceptions of risk or project feasibility. The critical role of institutional capital is illustrated by the magnitude of the challenge. To meet global infrastructure needs that are compatible with low-carbon and climate resilient development, some $7 trillion annually is needed over the next 15  years, of which $3.9 trillion annually is foreseen for developing countries (OECD, 2018). Compared to the current level of spending of $1.4 trillion, the estimated gap is estimated at $2.5 trillion (Betti et al., 2018). With annual official development assistance (ODA) at approximately $145 billion and annual philanthropic contributions of about $30 billion to developing countries, the need to attract institutional investors, who hold some $92 trillion in assets in OECD countries alone, becomes evident (OECD, 2018; Halland et al., 2018). Early signs suggest that private actors are responding positively to Agenda 2030. Individual firms—many involved as stakeholders in the creation of the SDGs—indicated that the SDGs would inform their business strategy: 71% of globally operating companies claimed that they were already planning to engage with the SDGs, with 41% stating that they will embed the SDGs in their strategies within 5 years (PwC, 2015). In a separate survey of chief executive officers (CEOs), 87% agreed that the SDGs provide an opportunity to rethink approaches to sustainable value creation (Accenture, 2016). With an estimated $12 trillion in new business opportunities, there is a clear business logic in these responses (van Tulder, 2018).

5.3 De-Risking Sustainable Business Models: Materiality Materiality assessment is a first step that firms can take to translate stakeholder concerns into an agenda of action. Originating from financial reporting, the concept of materiality is commonly considered as a threshold to identify items that influence the economic decisions of those using corporate reports, namely investors (Messier Jr et al., 2005). In recent years, materiality has emerged as a construct in sustainability reporting and has been formalized through the creation of new organizations such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative guidelines (GRI) or International Integrated Reporting Council (IR). Materiality, in a sustainability context, expands and challenges the traditional definition by including the environmental and social impacts of corporate activities, and, rather than narrowly focusing on the financial considerations of shareholders, it reflects a larger scope of information users (Puroila & Mäkelä, 2019). Each framework emphasizes different ESG elements that are tailored to a respective target audience. While GRI builds its materiality around a multi-stakeholder approach, SASB focuses on investor-centric material ESG information. IR centers its reporting across six different ‘capitals’: financial, manufactured, social and

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relationship, intellectual, human and natural (Willis, 2003; Khan et al., 2016; Green & Cheng, 2019). However, in a joint op-ed, the heads of GRI and SASB explained how materiality frameworks are complements rather than substitutes. They suggest that “rather than being in competition, GRI and SASB are designed to fulfill different purposes for different audiences (…) The GRI standards are designed to provide information to a wide variety of stakeholders and consequently, include a very broad array of topics. SASB’s are designed to provide information to investors and consequently, focus on the subset of sustainability issues that are financially material.”3 Regardless of whether or not the ESG frameworks are viewed as complements or substitutes, their implementation varies widely across organizations (Moroney & Trotman, 2016). This inconsistency has presented challenges to the systematic identification and prioritization of material ESG issues (Calabrese et al., 2016). Many scholars have asserted that stakeholder engagement does not automatically lead to corporate accountability or sustainability but simply serves as a tool of stakeholder management intended to further a firm’s financial interests (Brown & Dillard, 2015; Mitchell et al., 1997). This critique views corporate sustainability practices as reinforcing the status quo by prioritizing corporate financial interests over the pluralistic and democratic intentions of a broader set of stakeholders (Spence, 2007; Milne & Gray, 2013; Puroila & Mäkelä, 2019). In this essay, we downplay this critique and instead suggest that translating stakeholder concerns into the business language is actually beneficial towards creating an agenda of action. That is, self-serving corporate interests encourage firms to internalize the negative externalities their business models impose upon the environment and society (Bithas, 2011). To this end, blended finance offers one pathway to create a governance structure that formalizes stakeholder interests with clear incentives and expected outcomes.

5.4 Blended Finance Facilities The OECD defines blended finance as “the strategic use of development finance for the mobilization of additional finance towards sustainable development in developing countries” (OECD, 2018). This broad definition serves as an umbrella term for a number of different blended finance models. Blending combines financing from public and private sources to pursue both development and commercial objectives, underlining its hybrid character that operates between public and private spheres. As such, blending may be justified as a response to different types of problems. For example, it may be proposed as a means of addressing market failures (perceived or not) or to improve the risk-return relationship of investment projects (OECD, 2018).

 Tim Mohin and Jean Rogers. How to approach corporate sustainability reporting in 2017. Accessed: www.greenbiz.com/article/howapproach-corporate-sustainability-reporting-2017 3

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Table 5.1  Blended finance instruments Instrument Grants Debt instruments Equity Mezzanine finance Guarantees

Definition Transfers in cash and in-kind where no legal debt is incurred Transfers in cash and in-kind where legal debt is incurred (e.g. Loans, bonds and other securities) or could be triggered under certain conditions (e.g. reimbursable grants) A share in the ownership of a company or a collective investment scheme Hybrid instruments such as subordinated loans and preferred equity that present risk profiles between senior loans and equity Risk-sharing agreements under which the guarantor agrees to pay to the lender/ investor part of or the entire amount due on a loan, equity or other instrument in the event of non-payment by the borrower or loss of value in case of investment

In this way, blended finance is intended to explicitly crowd-in commercial investment. According to the DAC Creditor Reporting System, official development finance is provided using five main groups of instruments, illustrated in Table 5.1, which can be further structured into more complex mechanisms such as funds, syndication, securitization, or public private partnerships (Pereira, 2017).

5.5 Trust Brokering from Civil Society Value creation in public-private partnerships (PPPs), such as blended finance, delivers different types of benefits to public and private stakeholders through risk sharing and by combining resources and competencies (Kivleniece & Quelin, 2012). Importantly, the evaluation of PPP outcomes critically focus on the creation of public value (Reynaers, 2014). Given the complexity of decision making in PPPs, successful partnerships are not easy to navigate, and stakeholder value is often argued to be subject to issues of trust and control (Abdullah & Khadaroo, 2020). Here, we argue that the inclusion of civil society brings important benefits to the evaluation of public outcomes in blended finance facilities. Trust is the willingness to be vulnerable to the actions of others due to a positive expectation that they will act as agreed and in the interest of the partnership (Mayer et al., 1995; Edelenbos & Klijn, 2007). Trust appears to be a promising coordination mechanism in societal arrangements where public and private organizations are increasingly horizontally related (Castells, 2000). In such relations, hierarchy rules and direct supervision seem less suitable coordination mechanisms (Alter & Hage, 1993; Lane & Bachmann, 1998). Research has also indicated that to successfully leverage trust in PPPs, the operational capabilities of public, private and civil society actors related to their professional expertise and core technical knowledge must be considered (Winter, 2003; Crosby et al., 2017; Brogaard, 2019). In blended finance, civil society (e.g., nonprofits) takes on the role of impact evaluator. Due to the non-distribution constraint, according to which nonprofits are not allowed to distribute profit to private parties, the public ascribes them higher levels of trustworthiness compared to other institutions or sectors (Hansmann, 1980).

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Additionally, nonprofits engaged in blended finance are typically selected because they have deep expertise in the targeted social/environmental objective and long track records of serving the public interest. The core competencies of civil society can therefore help bridge the divide between public and private interests and increase perceptions of benevolence (i.e., whether partners believe each other to have only their own self-interest in mind), ability (i.e., the perception of the other partner’s competencies) and integrity (i.e., whether the partners can expect one another to do what has been agreed) that help to build a basis of mutual understanding (Edelenbos & Klijn, 2007; Mayer et al., 1995).

5.6 Challenges to Blended Finance Blended finance is not without challenges. As forms of public-private partnerships, blended finance transactions are subject to many of the common problems associated with PPPs such as failures in contract design, waste and unrealistic expectations. Proponents of blended finance claim that if grants and concessional capital are structured correctly, transformative change and sustainable markets would open up (Christiansen, 2021). However, blended finance requires actors with diverse impact objectives and financial return profiles. Put simply, private investors want to make the most returns, for a given risk; grant-makers want the most impact. The divergent value systems and governance logics of these actors can complicate day-to-day management. In practice, this often results in operational difficulties and finger pointing when things do not go according to plan. Finally, because blended finance is used to finance private investments, there is also potential for a lack of transparency and few details are publicly available. Importantly, blended finance is a solution that primarily addresses related financial risks (Mawdsley, 2015). Thus, even if the private firms fail to deliver after being granted subsidies and risk underwriting, governments remain responsible for the provision of services (Bayliss & Van Waeyenberge, 2018). Estimates show that of the 6273 PPP projects from 1991 to 2015, 67 were distressed (1.1%) and 259 were cancelled (4.1%) (Lee et al., 2018). Given the fiscal constraints of developing countries, this raises the normative question of whether subsidizing the sometimes elusive promises of markets is the best sustainability policy.

5.7 Illustrative Cases Depending on the stakeholder engagement process and type of externality, firms may choose a sector-wide approach or go-it-alone to tackle ESG issues in the value chain. We present the financing structures of two illustrative cases: Transforming Education in Cocoa Communities (TRECC) and Tropical Landscape Finance Facility (TLFF). Both cases use the SDG framework to meet specific social and environmental objectives identified through materiality analysis. Given the

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Table 5.2  Description of cases

Cases Geographical area Capital allocation Implementation year Private stakeholders

TRECC Transforming education in cocoa communities Ivory Coast $85 million 2015 World cocoa foundation*

Public stakeholders

Ivorian government

Nonprofit stakeholders

Jacobs Foundation, Bernard van Leer Foundation, UBS Optimus foundation, Innovations for Poverty Action SDG1, SDG4, SDG 8.7, SDG17

Stated SDG objectives Financial mechanism Pay for success grant funds used to pilot and scale up evidence-based programs Other considerations Program runs from 2015–2030

TLFF Tropical landscape finance facility Indonesia $95 million 2018 Michelin, BNP Paribas, ADM capital UNEP, Government of Indonesia, USAID World Wildlife Fund, World Agroforestry Centre SDG8, SDG12, SDG15, SDG17 Lending platform and grant fund for technical assistance Maturity dates: 2023, 2025, 2033

Note. IPA Innovations for Poverty Action, BNPP BNP Paribas, UNEP United Nations Environment Programme, World Agroforestry Centre (also known as International Centre for Research in Agroforestry or “ICRAF”), WWF World Wildlife Fund. The World Cocoa Foundation (WCF) represents the interests of eleven cocoa and chocolate companies (Barry Callebaut, Cargill, Chocolonely Foundation, ECOM, Ferrero, Hershey, Mars Wrigley, Mondelez International, Nestlé, Olam Cocoa, Touton)

complexity of the objectives, each partnership engages actors from the public, private and nonprofit sectors. The partnerships enacted divergent corporate strategies. TLFF was conceived by the government and directly engages individual firms. TRECC was launched by a nonprofit aiming to crowd-in firms active in the cocoa industry using an industry level approach. The financial mechanisms also differ for each case. TRECC’s approach uses pay for success grants while TLFF uses a structured finance facility with supplementary technical assistance grants. The main characteristics of each case are summarized in Table 5.2.

5.8 Comparative Analysis of TRECC and TLFF Multistakeholder Partnerships Both TRECC and TLFF used blended finance solutions to engage corporate actors to address specific SDGs and contribute to Agenda 2030. Through these stakeholder engagements, TRECC used the material ESG concern of child labor to crowd-in cocoa companies. By contrast, environmental protection and local community development were critical components identified by TLFF to finance the Michelin-­ RLU joint venture.

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Materiality While both TRECC and TLFF used materiality concerns as a way to crowd-in corporate partners, they took divergent approaches. Corporate interests were pooled through a sector-based foundation in the case of TRECC while TLFF directly targeted the materiality concerns of a single firm. The difference in corporate engagement could be attributable to partnership objectives. While child labor is an explicit ESG concern for cocoa companies, the link to education requires a broader view of materiality. For Michelin (and RLU), the partnership enabled them to directly integrate externalities created through the supply chain. There is no risk of free-riding in the RLU case: the land used for the plantation is only contracted to RLU. By contrast, cocoa companies operating in Ivory Coast may want to reap the benefits of child-free cacao but may be unwilling to contribute financially.

Blended Finance Facility TRECC primarily used pay-for-success matching grants while TLFF used a structured finance facility that catered to a wide range of investors through tranching. The choice of blended finance facility may also relate to nature of the externality created in the supply chain. Since TRECC is tackling a social objective that has been traditionally attended to by the public sector, using an impact fund to seed investments in private education startups might appear as illegitimate, especially since the partnership is still investigating which intervention models will work in the Ivorian context. The use of matching grants encourages experimentation and by opening up funding opportunities to cocoa companies directly, the partnership encourages individual agency on behalf of the cocoa firms. Conversely, the TLFF is a more straightforward financial transaction. In a sense, Michelin could have floated a public note to finance the plantations. However, the Indonesian government may have been unwilling to grant licenses without the environmental protections. In this case, the blended finance facility serves to protect both interests.

Trust Brokering While the ties to materiality and blended finance mechanism structures differ from case to case, the role of trust brokering appears to have played a significant role in both multistakeholder partnerships. To this end, it appears nonprofit organizations such as the WWF and IPA are integral to the structure of the partnership. By tackling issues that are prone to self-serving such as impact measurement, these actors serve as a bridge between the corporate interests and public accountability.

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5.9 Conclusion Too often, firms dedicate resources to the wrong channels, either by going it alone or through non-committal initiatives like the U.S. Business Roundtable’s 2019 shift from “shareholder capitalism” to “stakeholder capitalism.” We believe that the time for talk is over. Today, firms need to demonstrate credible progress towards a sustainable future. By forcing firms to have “skin in the game,” blended finance is a promising solution that also plays to the strengths of government and non-profits. Public actors step in to offer financial guarantees while civil society monitors the predefined social/environmental impact. Recent research indicates that a focus on sustainability issues that are financially material to a firm yield financial benefits such as better stock price informativeness and even superior long-run returns (Khan et al., 2016; Grewal et al., 2020). However, successfully leveraging sustainability initiatives requires firms to know which ESG factors are financially material. As a result, the identification of material ESG issues could help firms to understand where they are likely to positively impact society and simultaneously boost business performance. In this essay, we have sought to understand how firms overlay ESG and SDG frameworks via collaborative, multistakeholder blended finance mechanisms to address sustainability issues related to their operations and value chains. With the current appeal to reinvent government as more enterprising and catalytic, our inquiry shows that public actors do indeed forego financial incentives to crowd-in private actors. It remains to be seen whether this leveraged position will pay off in terms of social and environmental achievements. One promising aspect of the partnerships in this essay is that civil society organizations serve as protectors of the public interest, either by serving in the capacity of monitoring or by carrying out the impact assessments to determine the effectiveness of the respective interventions.

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Vanina Farber is an economist and political scientist specializing in social innovation, corporate social responsibility and sustainable finance with more than 20 years of consultancy, research and teaching experience, working with academic institutions, multinational corporations and international organizations.  

Patrick Reichert conducts research at the intersection of entrepreneurship, finance and social impact, with a particular focus on the mechanisms that investors use to seed investment in social organizations.  

Chapter 6

Responsible Business and Integrated Stakeholder Reporting: Towards a Stakeholder Model for Integrated Reporting of ESG and SDG Jacob Dahl Rendtorff

Abstract  The chapter discusses the problem of how business reporting can include financial and non-financial data of measurement. Here, it is required to develop a model for integrated reporting that implies a stakeholder-based decision-making framework. Such decision-making implies focus on strategy, management, governance, and transparency. Today, integrated reporting combines reporting of ESG and SDG performance. To realize this kind of integrated stakeholder reporting, it is necessary to include all important stakeholders of the company. With this approach stakeholder reporting in a stakeholder perspective contributes to increase business legitimacy. Thus, based on theory of business ethics and stakeholder management, the chapter presents a stakeholder framework for integrated reporting that considers both ESG and SDGs as essential for integrated CSR reporting.

How can a business report on the sustainable development goals in a measurable framework that includes financial and non-financial data of measurement? In this chapter, I will develop a model for integrated reporting that can be used as a stakeholder-­based decision-making framework of the corporation (strategy, management, governance, and transparency) in order ensure disclosure, and dialogue with stakeholders. I define this model of integrated reporting as a stakeholder model of integrated reporting of ESG and SDGs. The idea of a stakeholder model is that reporting does not only cover economic earnings but relates to all important stakeholders of the company, including internal and external stakeholders, i.e. investors, employees, customers, suppliers and local community. This means that integrated reporting aims at including important stakeholders of the company in social J. D. Rendtorff (*) Department of Social Sciences and Business, Roskilde University, Roskilde, Denmark e-mail: [email protected]; https://forskning.ruc.dk/en/persons/jacrendt © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Kacanski et al. (eds.), Measuring Sustainability and CSR: From Reporting to Decision-Making, Ethical Economy 64, https://doi.org/10.1007/978-3-031-26959-2_6

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reporting that supplements financial reporting. Indeed, this clarification of sustainability performance of the company based on integrated reporting can minimize the gap frame between sustainable and non-sustainable management (Muff et al., 2017). Moreover, focus on integrated reporting in a stakeholder perspective can contribute to increased business legitimacy (Rendtorff, 2020). The theoretical perspective of this chapter comes from business ethics and stakeholder management research on accounting and reporting of SDGs and ESG indicators in the business corporation. Moreover, philosophy of management represents the ontological and epistemological basis of this research from the perspective of hermeneutic philosophy of sciences (Rendtorff, 2013a, b, c). This represents a move towards integrated reporting of business sustainability performance in stakeholder management (Van Zanten et al., 2018). After presenting the stakeholder framework for integrated reporting in an institutional perspective, I will, as a case illustration, briefly apply this framework to the Danish legislation on business financial reporting that focuses on CSR and ESG as essential dimensions of non-financial reporting of the annual performance large businesses in Denmark.

6.1 Background We need to conceptualize impact of society by business in a system of integrated reporting based on stakeholder management to improve transparency of business and management to develop new progressive business models for strategy and integrated reporting for stakeholder dialogue, responsible management, and reporting of ESG and SDGs impact on society (Villiers et al., 2014). Today, business organizations have a focus on SDGs and responsible business, but there is a need to operationalize this efficiently throughout the organization, based on increased focus on stakeholders (European Commission, 2017; Danish Industry, 2018). There is a need to develop systems of integrated reporting that businesses can use to communicate with external and internal stakeholders for responsible ESG and SDG reporting and management. The important need in different business organizations covers the concern to develop stakeholder dialogue in relation to implementation and reporting on ESG and SDG management and compliance. This includes the need to develop instruments and procedures for developing the realization of stakeholder reporting of SDGs in the management of the organization. There is a need to improve stakeholder participation and reporting through interactive dialogues (Bonnafous-­ Boucher & Rendtorff, 2016). Similarly, many businesses need to improve stakeholder reporting and acknowledgment of their impact on society and their contribution to sustainable development. They need to develop this into one single report combining financial and non-financial elements (Eccles & Krzus, 2010). This implies clarification and critical evaluation of reporting practices of stakeholder management applied to business organizations. There is a need for determination of different formal or non-formal concepts of stakeholder reporting in

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business organizations in order to find a transparent basis for responsible stakeholder management of the business organization. The development of a new reporting practice is the basis for the formulation of business models for the improvement of stakeholder dialogue, communication, and engagement (Harrison et al., 2019). This implies the integration of SDGs in stakeholder management in relation to business development and strategy. The SDGs have been proposed as an essential framework for stakeholder management and leadership to improve the sustainable impact of different business organizations on society. Nevertheless, there is a need to clarify strategic stakeholder reporting practices underlying this proposal of responsible leadership based on SDG-strategy and management (Baumgartner & Rauter, 2017). It is necessary to provide an integrated reporting package for stakeholder reporting and business models of SDG-stakeholder management for different businesses.

6.2 Towards New Stakeholder Reporting Models Thus, we need to develop new reporting models that can function as the basis for measurement of societal impact in relation to specific stakeholders and for decision-­ making in business corporations that is clearly focused on the concern for different stakeholders (Searcy, 2014). The theoretical basis for this is a development of an integrated reporting practice that builds on method, theories, and empirical knowledge in an interdisciplinary triangular research field between humanities and social sciences (philosophy of management, business ethics, responsible business), business economics, and business administration (accounting, strategy, business models research, CSR and SDG research) (Bebbington & Larrinaga, 2014). These different approaches are here used as essential models for stakeholder reporting, based on the need for a broader interdisciplinary approach to reporting in order to capture the role of different stakeholders in relation to the firm. This concept of integrated stakeholder reporting relies on a critical evaluation of the concept of stakeholder dialogue applied to private business, democratic business, public business organizations, and non-governmental organizations. This conceptual analysis of the concept of stakeholders in the different formal and non-formal concepts of business is a development of stakeholder theory that has been focused on strategy and decision-making seen from the point of view of the management of the organization rather than from the point of view of the integration of all stakeholders in transparent decision-making through dialogue, communication, and engagement (Freeman et al., 2010). Concerning the field of research of the development of new models for responsible stakeholder management and governance of the sustainable development goals (SDGs), there is a growing research field of business models and SDGs. It addresses SDG stakeholder management and leadership in business organizations with focus on a system of integrated reporting in both finance and industry organizations that integrates concern for the different stakeholders in management.

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The reason for this is that transparent measurement and disclosure of sustainability performance is now considered to be a fundamental part of effective business management, governance of different business organizations, and NGOs and essential for preserving trust in business and other organizations as a force for good governance and legitimacy of organizations in society as good corporate citizens (Bassen & Kovács, 2008). Yet, the complexity surrounding sustainability and SDG disclosure in relation to specific stakeholders has made it difficult to develop a comprehensive solution for corporate and organizational reporting that is urgently needed to strengthen different businesses and cooperative decision-making processes that drive organizational development, competitiveness, and sustainable growth. Therefore, we need integrated stakeholder reporting to have multi-­functional and polycentric concept of the different bottom-lines of the firm with focus on strategic performance and accountability of performance on different scales of measurement.

6.3 Theoretical Framework for Integrated Stakeholder Reporting The theoretical framework for this development of integrated stakeholder reporting in different business organizations is stakeholder theory (Bonnafous-Boucher & Rendtorff, 2016). This approach proposes strategic management as stakeholder management (Freeman, 1984). We can propose Freeman’s principles of responsible stakeholder management as the basis for developing theory and practice of integrated reporting. These principles are the following: (1) Stakeholder interests go together over time (2) Stakeholders consist of real people with names and faces and children. People are complex (3) We need solutions to issues that satisfy multiple stakeholders simultaneously (4) We need intensive communication and dialogue with stakeholders – not just those who are friendly (5) We need to have a philosophy of voluntarism, to manage stakeholder relationships ourselves rather than third parties such as governments (6) We need to generalize the marketing approach (7) Everything that we do serves stakeholders. We never trade off the interests of one versus the other continuously over time (8) We negotiate with primary and secondary stakeholders (9) We constantly monitor and redesign processes to make them better serve our stakeholders (10) We act with purpose that fulfills our commitment to stakeholders. We act with aspiration towards fulfilling our dreams. With this concept of principles of stakeholder management, stakeholder engagement or stakeholder responsibility are expressions of stakeholder management for business organizations (Bonnafous-Boucher & Rendtorff, 2016; Harrison et al., 2019). With the UN Sustainable Development Goals Agenda (SDG) from 2015, we move from CSR to stakeholder responsibility for SDGs. With this idea of business in the service for society, business corporations engage in partnerships for SDGs with business, public institutions and NGOs. Thus, with stakeholder theory as the basis for

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integrated reporting we integrate CSR, business ethics and SDGs in responsible management of sustainability (Rendtorff, 2019a, 2019b). We can in this context propose the SDGs as a nexus of principles that direct the focus of concerns in relation to stakeholders of the business corporation. It contributes to relate  decision-making to concerns that go beyond corporate boundaries (Seuring & Gold, 2013). Here, the 2015 SDGs constitute a nexus of bottom-lines (www.un.org) and this nexus of bottom-lines can be considered in the perspective of stakeholder theory as values relating to specific stakeholders. Thus, when we interpret the SDGs in terms of stakeholder theory, we can accordingly refer to 17 bottom-­ lines relating to different clusters of stakeholders including (1) No Poverty (2) Affordable and Clean Energy (3) Climate Action (4) Zero Hunger (5) Decent Work and Economic Growth (6) Life Below Water (7) Good Health and Well-Being (8) Industry, Innovation and Infrastructure (9) Life on land (10) Quality Education (11) Reduced Inequalities (12) Peace, Justice and Strong Institutions (13) Gender Equality (14) Sustainable Cities and Communities (15) Partnerships for the Goals (16) Clean Water and Sanitation (17) Responsible Consumption and Production. These sustainable development goals are goals that the UN is committed to work for in order to build a sustainable planet for future generations of stakeholders. These goals can be presented as bottom lines for measurement of CSR and sustainability (United Nations, 2015). The sustainability agenda  for the world includes people, planet and profit referring to economic growth, decent jobs, sustainable consumption and production and peace and justice in a cosmopolitan perspective (www. un.org). These UN goals can be situated within the framework of cosmopolitan business ethics (Rendtorff, 2017). This is an agenda for global ownership and responsibility for the goals integrating governments and civil society. This leads to the vision of cosmopolitan business ethics based on sustainable development. In this context SDG 17 about Partnerships is essential for defining the integration of the SDGs in stakeholder reporting. Cross-sector partnerships based on stakeholder reporting transform the concept of value in business by creating partnerships between profit and non-profit organizations. Instead of seeing a contradiction between profit and non-profit stakeholder reporting of SDG performance, we can see value creation as embedded in contextual relations with different kinds of organizations and people. According to stakeholder theory, important values are not only economic transactions, but enduring relations and partnerships are essential for value creation. In this context, R.  Edward Freeman has emphasized societal embeddedness of business organizations as important for creation of stakeholder value. Moreover, stakeholder management and reporting should follow a principle of human complexity where we recognize the plurality of concerns that are necessary for value creation. Indeed, in this perspective, stakeholder reporting implies a broader conception of value that aims at integrating economics and society. This multi-stakeholder approach to the SDGs conceives partnerships as important for stakeholder management and therefore stakeholder reporting implies a holistic approach to the SDGs. On this basis, we can see stakeholder reporting in the perspective of integrated reporting for measurement of social performance of business (Stubbs & Higgins,

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2014). In order to develop this standard for integrated reporting we will use as framework the seven principles of the International Integrated Reporting Council (IIRC). This framework of the seven principles involves (1) Strategic focus and future orientation. Here, focus is on strategy and short, long and medium ability of value-creation (2) Connectivity of information. At this level it is important to give a holistic picture of factors that affect the organization’s value creation. (3) Stakeholder relationships. At this level, relations with stakeholders are presented and challenges of legitimation are discussed (4) Materiality. Here, there is disclosure of substantial factors affecting short, medium- and long-term value-creation. (5) Conciseness. (6) Reliability and completeness. The integrated report should be comprehensive and balanced. (7) Consistency and comparability. The information should be consistent and comparable in order to be efficient for value-creation. The International Integrated Reporting Council (IIRC) further emphasizes eight elements of stakeholder reporting that are central content of elements of a system of integrated reporting that can be understood as a framework for ESG and SDG stakeholder reporting: (1) Organizational overview and external environment. How does the organization relate to internal and external stakeholders? (2) Governance. What are the major elements for short, medium- and long-term value creation for stakeholders? (3) Business model. What is the organization’s business model in relation to sustainability and stakeholders? How can this business model be improved? (4) Risk and opportunities. How can integrated reporting contribute to determination of risk and opportunities of value-creation for stakeholders with focus on sustainability in short, medium- and long-term perspectives? (5) Strategy and resource allocation. How can the organization allocate resources correctly for stakeholders and for future visions of sustainability? And how does the organization see itself in the future?

6.4 Towards a Holistic Model of Stakeholder Reporting The value-creation of this approach to stakeholder reporting and measurement of societal impact lies in the development of an integrated reporting package as tool for financial services that creates best practice of decision-making, and new business models in relation to ESG and SDG in businesses. A holistic model of stakeholder reporting and measurement can further imply a theory of value-priorities (Mattsson & Rendtorff, 2006). Here, it is also important to deal with the paradoxes of sustainability that relate to stakeholder reporting (Hahn et al., 2014). The development of a new integrated stakeholder reporting approach that improves stakeholder dialogue and transparency leads to better relations between business and society, because stakeholder reporting implies broader concepts of value that combines social and economic dimensions in the definition of value-creation. Holistic stakeholder management and stakeholder reporting systems of ESG and SDG indicators improve transparency and creates value for much more efficient business. With integrated stakeholder reporting that provides relevant inputs for a gap analysis and

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self-assessment tool for business, we develop an important digital tool for a business model strategy and reporting  approach that can be used to fill in gaps and improve practice of sustainability over time. This is the basis for a more elaborate model of sustainability assessment (Maas et al., 2016). Thus, stakeholder reporting investigates value created for different stakeholders and integrates this  value in future strategies of the firm. With societal impact through value creation the focus on stakeholder management and integrated stakeholder reporting on ESG and SDGs is to develop strategy and accounting for shared value of business and society. It is here important to apply stakeholder theory to the analysis of sustainable development (Hörisch et al., 2014). Regarding grand societal challenges of sustainable transition, growth and employment based on sustainable development, this new integrated reporting approach will ensure the contribution of financial services to management of business organisations as good corporate citizens.

6.5 Legal Framework for Measurement of Integrated Reporting This development of an integrated reporting approach to ESG and SDG reporting and development of sustainable business models for different business organization in Denmark relates to important legal, ethical, and regulatory demands and conditions of society that can be illustrated more concretely with reference to the Danish law of financial statements and reporting requirements for different businesses. In general, the Danish law on financial statements and reporting divides companies into four accounting classes with different rules of financial statements according to the Danish Financial Statements Act (RSM Global, 2022). The division in accounting classes is a way to divide companies to determine requirements for financial statements and reporting. The law distinguishes between 4 accounting classes A, B, C and D, where there are few accounting requirements in A and a lot in D.  Accounting class  A is the group of individual companies. B covers micro enterprises and other smaller enterprises. C is divided into medium-sized and large-­ sized companies and large companies fall into accounting class D which is the accounting class with the strictest rules. The definition of accounting classes depends on turnover, balance sheet and on the number of employees in the company. The Danish law on business financial reporting has added an important requirement of CSR reporting (§ 99) which can be considered as essential for stakeholder reporting. Compliance with ESG and SDG indicators are important elements of this legal and regulatory demand. Companies in accounting class A are not obliged to prepare annual reports, but if they voluntarily prepare a report, it must include management statement, income statement, balance and accounting policies. Here, such companies are free to include elements of CSR, SDG and ESG reporting. Companies in class B should prepare an annual report that should be submitted to the Danish

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business authority. Companies in this class include smaller public and private companies, entrepreneurial companies and limited partnerships with turnover from 0–89 million DKK and 0–50 employees. Smaller companies in class B (B-micro) have very little requirements for their annual reports, while larger companies in this class have more requirements. Thus, in this group non-financial CSR and ESG stakeholder reporting will also be voluntary (RSM Global, 2022). Companies in class C include companies that are not in Class A and B and are not publicly listed limited companies. This class is also further divided into group C medium and group C large. This class includes companies with a turn-over up to 313  million DKK and an allowed number of employees up to 250. In this accounting class, formal requirements for preparing annual financial statements apply. Companies in in class D includes companies listed on the stock exchange and large state-owned public companies. This class covers all large companies with no specific size requirements (RSM Global, 2022). Accordingly, companies in classes C and D are required to prepare annual financial reports including management statement, management report, main and key figures overview, income statement, balance, equity statement, cash flow statement, notes, including an account of the accounting policies used accountant annotation. According to the law, CRS and ESG reporting should be contained in these reporting requirements. In this context, many of those companies have also started to include SDG-reporting. Moreover, from 2018 large companies (group D and C) are required to report on CSR-policy, impact on climate, human rights and environment, corruption and bribery, social conditions, and personnel, and in addition on business models, due diligence, financial and non-financial risks (Danish Industry, 2018). There is an increased need for stakeholder reporting of Danish business in relation to these legal requirements of the law on financial and non-financial integrated reporting. These requirements have had an impact on ethical demands and conditions for the businesses that need to comply with legal and regulatory standards, but in addition, also  would like to move beyond the law and comply with ethical demands and expectations of responsible business. Thus, following ESG standards and the UN SDG regulation, the Danish Business Authority encourages businesses to develop business models with integrated stakeholder management and stakeholder reporting related to the SDGs due to huge economic opportunities for Danish businesses not only at the Danish and international market, but also in emerging and frontier markets. Moreover, developing SDG business models and reporting procedures is considered both as a legal and regulatory requirement, but also as an ethical demand and economic opportunity for businesses in Denmark. Thus, growing ethical, legal and regulatory demand for integrated stakeholder reporting standards on ESG and SDG compliance and performance opens for a need for powerful integrated reporting systems and practices that can be used  by larger  companies as  well as by smaller and medium-sized businesses in Denmark. These regulatory standards may not only be applied in relation to private business, but also in relation to stakeholder management of public organizations (Pedersen & Rendtorff, 2004).

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6.6 Integrated Reporting Within the Framework of Institutional Order Ethics The framework for integrated reporting can be proposed by the institutional theory of order ethics as conceptualization of the institutional framework of business ethics for stakeholder management and reporting. As emphasized by Freeman, stakeholder management and reporting presuppose the social and cultural embeddedness of the firm. These framework conditions contribute to the institutionalization of corporate social responsibility (Rendtorff, 2011). The idea is that there is an institutional regulation of the free market which is essential for a good political and social order of a wellfunctioning society. By referring to the theory of the economic order, we describe the institutional conditions of reporting (Homann, 2002; Homann, 2003). In order, ethics, the idea of an order as a systemic condition refers to the concept of economic order (Wirtschaftsordnung), which defines the institutional limitations of business actions in strategic stakeholder frameworks as the basis for stakeholder reporting. According to Homann’s order ethics, ethical reflection needs to move beyond morality and look at economic and legal regulation to find the basis for ethics in society. Order ethics searches for the institutional conditions of ethics to regulate individual behavior knowing that individuals who are always egoistic can only act morally when they are determined by institutional limitations (Rendtorff, 2017). As such a framework theory, order ethics refers to the system of institutional order that conditions the embeddedness of the firm. Thus, with this we can say that integrated reporting needs to be based on an institutional order that defines the legal and political framework of the norms and rules within which the company operates in society. This legal and institutional framework is important as the basis of the definition of the social principles of integrated reporting to which the firm refers. This is essential for assessing the fundamental principles of sustainability (Maas et al., 2016).

6.7 Conclusion In this paper, I have proposed a model for measurement of societal impact based on responsible stakeholder management and integrated stakeholder reporting. I have argued for a stakeholder management model of integrated stakeholder reporting of ESG and SDG to ensure responsible management of impact on society. Here, Freeman’s principles of stakeholder management are important as theoretical framework and the work of the Integrated Reporting Council formulates practical principles of realization of stakeholder reporting in compliance with regulation of the Danish Business financial reporting act, combining compliance and values in integrated stakeholder reporting. Nevertheless, we should not forget the legal and institutional conditions and frameworks for stakeholder management and integrated stakeholder reporting which operate within the social, political, legal and economic

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order of society. Thus, integrated stakeholder reporting with the use of stakeholder management cannot really be said to presuppose a free market model, but rather the theory and practice of integrated stakeholder reporting are based on the institutional order conditions of society as the basic framework for use of ESG and SDG in integrated stakeholder reporting.

References Bassen, A., & Kovács, A. M. (2008). Environmental, social and governance key performance indicators from a capital market perspective. Zeitschrift für Wirtschafts- und Unternehmensethik, 9(2), 182–192. Baumgartner, R. J., & Rauter, R. (2017). Strategic perspectives of corporate sustainability management to develop a sustainable organization. Journal of Cleaner Production, 140, 81–92. Bebbington, J., & Larrinaga, C. (2014). Accounting and sustainable development: An exploration, accounting. Organizations & Society, 39(6), 395–413. Bonnafous-Boucher, M., & Rendtorff, J.  D. (2016). Stakeholder theory. A model for strategic management. Springer International Publishers. Danish industry. (2018). SDG-compass guide. www.sdgcompass.org. De Villiers, C., Rinaldi, L., & Unerman, J. (2014). Integrated reporting: Insights, gaps and an agenda for future research. Accounting, Auditing & Accountability Journal, 27(7), 1042–1067. Dumay, J., Bernardi, C., Guthrie, J., & Demartini, P. (2016). Integrated reporting: A structured literature review. Accounting Forum, 40(3), 166–185. EC (European Commission). (2017). Non-financial reporting directive  – transposition status. https://ec.europa.eu/info/publications/non-­financial-­reporting-­directive-­transpositionstatus_en Eccles, R. G., & Krzus, M. (2010). One report: Integrated reporting for a sustainable strategy. John Wiley & Sons. Freeman, R. E. (1984). Strategic management: A stakeholder approach. Pitman Series in Business and Public Policy. Freeman, R. E., Harrison, J. S., Wicks, A. C., Parmar, B. L., & de Colle, S. (2010). Stakeholder theory. The state of the art. Cambridge University Press. Hahn, T., Preuss, L., Pinkse, J., & Figge, F. (2014). Cognitive frames in corporate sustainability: Managerial sensemaking with paradoxical and business case frames. Academy of Management Review, 39(4), 463–487. Harrison, J. S., Barney, J. B., Edward Freeman, R., & Phillips, R. A. (2019). The Cambridge handbook of stakeholder theory. Cambridge University Press. Homann, K. (2002). Vorteile und Anreize. Zur Grundlegung einer Ethik der Zukunft. Mohr Siebeck Verlag. Homann, K. (2003). Anreize und Moral. Gesellschaftstheorie – Ethik – Anwendungen. Hörisch, J., Freeman, E. R., & Schaltegger, S. S. (2014). Applying stakeholder theory in sustainability management. Organization & Environment, 27(4), 328–346. Maas, K., Schaltegger, S., & Crutzen, N. (2016). Integrating corporate sustainability assessment, management accounting, control, and reporting. Journal of Cleaner Production, 136, 237–248. Mattsson, J., & Rendtorff, J.  D. (2006). E-marketing ethics: A theory of value priorities. International Journal of Internet Marketing and Advertising, 3(1), 35–47. Muff, K., Kapalka, A., & Dyllick, T. (2017). The gap frame – Translating the SDGs into relevant national grand challenges for strategic business opportunities. The International Journal of Management Education, 15(2017), 363–383. Pedersen, J. S., & Rendtorff, J. D. (2004). Value-based management in local public organizations: A Danish experience. Cross Cultural Management, 11(2), 71–94.

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Rendtorff, J. D. (2011). Institutionalization of corporate ethics and social responsibility programs in firms. In I. K. Buhmann, L. Roseberry, & M. Morsing (Eds.), Corporate social and human rights responsibilities: Global, legal and management perspectives (pp.  244–266). Palgrave Macmillan. Rendtorff, J.  D. (2013a). The history of the philosophy of management and corporations. In C. Luetge (Ed.), Handbook of the philosophical foundations of business ethics (pp. 1387–1408). Springer Science+Business Media. Rendtorff, J.  D. (2013b). Recent debates in philosophy of management. In C.  Luetge (Ed.), Handbook of the philosophical foundations of business ethics (pp.  1433–1457). Springer Science+Business Media. Rendtorff, J. D. (2013c). Philosophical theories of management and corporations. In C. Luetge (Ed.), Handbook of the philosophical foundations of business ethics (pp. 1409–1432). Springer Science+Business Media. Rendtorff, J. D. (2017). Cosmopolitan business ethics: Towards a global ethos of management. Routledge. Finance, governance and sustainability: Challenges to theory and practice series. Rendtorff, J. D. (2019a). Sustainable development goals and progressive business models for economic transformation. Local Economy, 34(6), 510–524. Rendtorff, J. D. (2019b). Philosophy of management and sustainability: Rethinking business ethics and social responsibility in sustainable development. Emerald Group Publishing. Rendtorff, J.  D. (2020). The concept of business legitimacy: Learnings from Suchman. In J.  Rendtorff (Ed.), Handbook of business legitimacy. Responsibility, ethics and society (pp. 3–30). springer. RSM Global. (2022). Regnskabsklasser. https://www.rsm.global/denmark/da/regnskabsklasser-­0 Schaltegger, S., Hansen, E. G., & Lüdeke-Freund, F. (2016). Business models for sustainability: Origins, present research, and future avenues. Organization & Environment, 29(1), 3–10. Searcy, C. (2014). Measuring enterprise sustainability. Business Strategy & the Environment, 25(2), 120–133. Seuring, S., & Gold, S. (2013). Sustainability management beyond corporate boundaries: From stakeholders to performance. Journal of Cleaner Production, 56, 1–6. Stubbs, W., & Higgins, C. (2014). Integrated reporting and internal mechanisms of change. Accounting, Auditing & Accountability Journal, 27(7), 1068–1089. United Nations. (2015). Transforming our world: The 2030 agenda for sustainable development. United Nations. Zanten, V., Anton, J., & van Tulder, r. (2018). MNEs and the sustainable development goals. Journal of International Business Policy, 1(3-4), 208–233. Jacob Dahl Rendtorff, PhD and Dr. Scient. Adm. is professor of philosophy of management and business ethics at the Department of Business and Social Sciences, Roskilde University, Denmark. Rendtorff’s research has a broad perspective on organization theory, management, responsibility, ethics and legitimacy of business firms and corporations, corporate social responsibility, business ethics, sustainability, bioethics and biolaw, human rights, political theory and philosophy of law. Rendtorff’s recent publications are Handbook of Business Legitimacy, Springer 2020,  Philosophy of Management and Sustainability, Emerald 2019,  Cosmopolitan Business Ethics. Towards a Global Ethos of Management, Routledge 2017 and Stakeholder Theory a Model for Strategic Management, Springer 2016. Rendtorff is Editor in Chief of the International Journal of Ethics and Systems (Emerald), Editor of the Springer Series Ethical Economy, Associate Editor of Social Responsibility Journal (Emerald) and European Editor of Journal of Business Ethics Education. Presently, Rendtorff’ s main research interests are philosophy of management, stakeholder theory, sustainability, CSR, and cosmopolitan business ethics.  

Chapter 7

Social Representations of Responsible Management: An Alternative Measure of Sustainability? Charlotte Durieux, Marine De Ridder, Anne Rousseau, Alain Ejzyn, and Frederik Claeyé

Abstract This chapter explores an alternative to traditional measurement approaches of sustainability in the field of management by considering social representations of responsible management. Questioning the relevance of normative approaches (widely used in management) especially regarding sustainability, the proposed approach aims to identify the social representations of (some of) the stakeholders of responsible management enabling us to highlight some of its characteristics. It is imperative to take them into consideration, and to follow their evolution as long as the ambition of the measure is the steering/development of sustainability (and not an end in itself). The more you listen to diverse voices, the more you expand your ideas and thoughts, the more you innovate and the more you succeed. Meetings in your company are not one unified melody, they are a symphony of all instruments. – Ilham Kadri, CEO of Solvay, ICHEC Back-to-School Ceremony, September 24th, 2021, our translation.

7.1 Introduction This chapter explores an alternative to traditional measurement approaches of sustainability — mostly based on quantitative indicators —in the field of management. Sustainability has received significant enthusiasm in corporate and scholars’ agendas over the last decades. Indeed, facing social, economic, and environmental challenges (such as climate change, ocean acidification or rising inequalities), it seems largely accepted that we must reconsider the ways we organize ourselves, our C. Durieux (*) · M. De Ridder · A. Rousseau · A. Ejzyn · F. Claeyé ICHEC – Brussels Management School, Woluwe-Saint-Pierre, Belgium e-mail: [email protected]; [email protected]; [email protected]; [email protected]; [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Kacanski et al. (eds.), Measuring Sustainability and CSR: From Reporting to Decision-Making, Ethical Economy 64, https://doi.org/10.1007/978-3-031-26959-2_7

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organizations, and more broadly our society. To address these Grand Challenges (e.g. George et al., 2016), a new field of research is emerging around the notion of responsible management (Laasch et al., 2020). In this chapter, we investigate what do social representations of management and organizations tell us in terms of measuring sustainability. Using an exploratory research project on young generations at work as an illustration, we show how our methodological approach helped us to reveal tensions and complex phenomena that need to be considered while trying to develop a responsible management practice. We thus contribute to the debate on measuring sustainability by considering social representations of responsible management to evaluate sustainability within organizations. We conclude by pointing out the implications of this alternative measure of sustainability for researchers and practitioners.

7.2 From Sustainability to Responsible Management Corporate sustainability is broadly defined as “a company’s activities – voluntary by definition – demonstrating the inclusion of social and environmental concerns in business operations and in interactions with stakeholders” (van Marrewijk & Werre, 2003, p. 107). As mentioned by Ergene et al. (2021), a severe limitation of the field is that research on corporate sustainability tends to reinforce the conventional economic principles and does not delve into the root causes of the problems we are facing. Responsible management is already well-established in the education field. Kick-started by the UN initiative on the Principles for Responsible Management Education (PRME), responsible management education has become a growing and dynamic field of research. The PRME initiative has been supported by hundreds of educational institutions and underlines the commitment of the signatories to adopt a responsible management perspective (e.g. Alcaraz et al., 2011). While the educational lens is critical to question the way we educate future managers, calls are growing louder to study how responsible management translates into actual practices within the organizations (Gherardi & Laasch, 2021; Laasch et al., 2020). If the emergence of the concept of responsible management is therefore rooted in the context of education (e.g. Dyllick, 2015), the literature understands it as “the microeconomic translation of sustainable development” (Dupuis, 2007, p. 131, our translation). It aims to move towards a global performance, which considers economic, social and ecological dimensions. This perspective twist, which favors the creation of sustainable value for companies, promotes a global responsibility, through values, methods, research, partnerships and dialogue (Audebrand, 2018) as well as a multi-stakeholder approach and a consideration of temporalities (Laasch & Conaway, 2014). There is no consensual definition of responsible management (Nonet et  al., 2016). If some authors used students’ perspectives to define the notion (Nonet et al., 2016), others have focused on a specific angle such as practices (Gherardi & Laasch,

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2021) or values (Audebrand, 2018). Carroll et al. (2020) took another perspective by suggesting that responsible management is a multifaceted notion that needs to keep a multiplicity of conceptualizations. In our research, we consider responsible management through different managerial practices implemented in organizations that contribute to global performance and more broadly, to sustainable development. Thus, we do not take a normative approach of responsible management but rather try to understand how actors’ social representations can help us measure, or at least evaluate, responsible management.

7.3 Measuring Sustainability Through Social Representations As presented above, responsible management is based on intangible elements. Since responsible management is multi-dimensional, managing responsibly is a complex activity as the balance between the different dimensions is hard to find and evolves over time (e.g. Gherardi & Laasch, 2021). So how can we find indicators on the different dimensions of responsible management? While we might draw inspiration from diverse quantitative indicators to measure sustainability (e.g. Székely & Knirsch, 2005), how can we evaluate responsible management? How does it create sustainable value for all stakeholders? Moreover, what temporalities should we take into account? To move towards an answer, we propose in this chapter to consider social representations to assess responsible management as a way to measure sustainability. Our research question is therefore: What do social representations of management and organizations tell us in terms of measuring sustainability? We use a research project on young generations at work as an illustration to suggest a methodological approach to reveal tensions and complex phenomena intrinsically linked to responsible management. We propose a qualitative approach (Creswell & Poth, 2016) to capture social representations of the different stakeholders as a complement to traditional quantitative measurements. In fact, this method allows us to highlight the complexity of the studied phenomena as well as the tensions at stake.

7.4 Methodological Approach Our illustrative research investigated the social representations of business school students (and students-workers), workers with up to 3 years of professional experience and managers to characterize the place given to responsible management within these young workers’ expectations of the organizations and their practices.1

 Feel free to contact the authors to get more detailed findings on the study https://www.ichec.be/ en/chair-innovative-management-practices. 1

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We conducted six focus groups with each of these three stakeholders to apprehend their social representations of responsible management (Abric, 2016). This approach is particularly conducive to the co-construction of meaning (Kalampalikis, 2011) since it takes into consideration the interactions so often neglected in qualitative studies (Farr, 1993). Social representations form “universes of opinion” unique to a group of individuals in relation to their environment (Moscovici, 1976 in Gachassin et  al., 2013).  Focus groups allow researchers to access the collective dimension of social representations (Guillemette et al., 2010). In our illustrative research, focus groups are then mobilized to build stakeholders’ representations of the business world and its management. This data collection also aimed at identifying whether characteristics of responsible management are (more or less) present in their discourse. Six digital focus groups gathering four to six people were organized, facilitated by a researcher assisted by two colleagues in charge of taking additional notes and logistics. The focus groups were done online (due to COVID-19) and their description is presented in Table 7.1. A call for volunteers was launched among Master students at ICHEC Brussels Management School. For young workers and managers, we shared our call via LinkedIn and our professional networks. The focus group discussion is divided into three parts which question: (1) the characteristics of an ideal job; (2) the managerial practices considered as essential or to be avoided; and (3) how management will evolve in the future and the challenges it will bring. In the case of the managers, we interrogate their perception regarding the expectations of youngsters in organizations. Data were analyzed by constructing mind maps allowing us to apprehend a concept (responsible management in this case) and understand its contextual and systemic dimensions (Nonet et  al., 2016). The mind maps resulting from the focus groups are subjected to a transversal analysis, which highlights the specificities inherent to responsible management. Indeed, a mind map “consists of a central idea (expressed in the form of a picture of words and a picture) from which radiate ideas that relate to the central idea. The structure is dentric (tree-like) usually with

Table 7.1  Description of the focus groups #FG Participants’ profile FG1 Students-workers (Master) FG2 Students (Master)

Number of participants (Women/Men) 5 participants (2 W/3 M) 5 participants (5 W)

FG3 Students (Master)

3 participants (2 W/1 M)

FG4 Young workers FG5 Managers

6 participants (5 W/1 M) 4 participants (3 W/1 M)

FG6 Managers

4 participants (3 W/1 M)

Date Duration (min) October 2020 83 November 2020 November 2020 May 2021 September 2021 September 2021

78 61 67 72 84

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branches of diminishing size – ‘thick’ toward the center and finer toward the periphery” (Brightman, 2003, p.2). This allowed us to underline the tensions involved. Throughout this illustrative research, the social representations, put forward by the focus group participants, capture elements, values, and discourses that can be attributed to responsible management. The mind maps enable therefore the observation of gaps between managerial discourse and practices as well as gaps between responsible management intentions and their execution, on the one hand. On the other, it highlights the complexity of the implementation of such responsible management and thus of measuring sustainability in the field of management. Indeed, the method brings out several tensions emerging from the dialog between participants.

7.5 Findings and Discussion Overall, our data suggest that social representations of managerial discourse is well considered as a practice anchored in values and social norms (Bruce et al., 2011). Furthermore, sustainability through responsible management is viewed as a discursive practice and findings show a lack of coherence between practices leading to tensions.

7.5.1 Beyond Good Intentions In the collected data, characteristics of responsible management were not predominant in the discourse of the participants of the research. Nonetheless, new items seem to require attention which would not have been detected through quantitative indicators. Items such as autonomy (flexibility), control (work-life balance), impact (on society and environment), values, procedural organizational justice (to be treated fairly by peers), and recognition were singled out from the dialogues as key components of the social representations of young workers’ expectations. It shows us that responsible management cannot be restricted to norms and predefined standards. Uncovering what characterizes responsible management within organizations through interactions with all stakeholders challenges preconceived ideals generally pushed by other instances (top management, external institutions, and academics). In terms of practices, the outputs of the discussions highlight that sustainability is mainly conveyed through managerial discourse that is considered as a practice and, as crucial to the implementation of a responsible management. However, and even though discourse is based on values, social norms and knowledge that reflect sustainability intentions, the reality behind the other enacted practices (for example, recognition) is quite divergent. Consequently, these focus groups emphasize that discourse questions the coherence between managerial practices in a sustainability perspective.

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Furthermore, the illustrative research brought out (other) essential managerial practices to meet younger generations’ expectations of the business world. Organizations need to be able to go beyond good intentions (managerial discourse) and sustainability objectives need to be embedded into managerial practices, processes, and systems. The focus groups pointed out a clear dissonance, a lack of coherence between the managerial discourse, the values proclaimed in terms of sustainability and the practices to enact them. For example, all participants agreed on the fact that making an impact on society and the environment contributes to the meaning they give to their job and the organization’s purpose is a matter of importance to them. But when asked what practices were essential in their opinion, none of them (managers nor young workers/students) raised any concerns about the responsible implementation or consequences that these practices could generate. This topic linking the responsible/sustainable dimension of practices in its alignment, design or implementation is yet to be explored by researchers in the field so as to provide managers with the tools they need to succeed in this endeavor. Ultimately, the proposition questions the tensions it creates but more so, how do organizations face them?

7.6 Responsible Management, a Management of Tensions? As underlined in the methodology section, social representations enable us to detect tensions emerging out of the different focus groups. This reveals the complexity of what responsible management is, as well as its implementation. Our proposed qualitative approach highlights tensions related to management practices and has produced, amongst others, three explicit examples of those tensions: work autonomy versus control, impact versus values, and procedural justice versus recognition. Firstly, the balance between giving autonomy at work and monitoring results (control) remains a strong tension for all the stakeholders participating in the research. Table 7.2 illustrates the tension with quotes from the research project. Secondly, impact and performance in the perspective of responsible management are viewed as tri-dimensional (economic, environmental, and social). Usually, organizations, depending on the context they evolve in, have no choice but to prioritize between these economic, social and environmental dimensions of performance in order to make those impacts last. But if values need to be embedded in the vision and impact as well as being embodied by each member of an organization, it then leads to a tension between impact and values, whereby values are subjected to the same prioritization which can, in the long run, be detrimental to the commitment of employees. The question is now, who can be accountable for the decision of making a corporate value more ‘valued’ than others in a perspective of responsible management? The tension asks as well, the question of the ‘how’ to articulate values regarding the choices made in terms of impact. Quotes to illustrate these findings can be found in Table 7.3.

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Table 7.2  Illustrative quotes for the tension between autonomy and monitoring results Tension between autonomy at work and monitoring results (control)

Illustrative quotes (our translation from French) « Empowering but still guiding, it is something that I observe a lot. » – FG5 (managers) « I believe precisely with young people, we must not be too prescriptive, we must certainly not give them tasks, we must certainly not micromanage them, but we must define with them objectives that make sense in their personal journey, in their convictions. » – FG6 (managers) « To have some autonomy in tasks (...) [is] to be able to do the tasks as you feel. » – FG2 (students) « Trust is essential (...) a manager is above us, but I don’t see the relationship as someone who is going to tell us what to do and give us orders, but rather a relationship of sharing and communication, less a relationship where things are dictated to us, but rather a collaboration. » – FG2 (students)

Table 7.3  Illustrative quotes for the tension between impact and values Tension between impact and values

Illustrative quotes (our translation from French) « The feeling of contributing to a better society… Not all companies can afford to offer societal missions, but I think it’s really important, even if it’s not the company’s core business, even if it’s not its ‘raison d’être’, that the company can also position itself by doing CSR. That people feel proud to belong to this company. » – FG6 (managers) « It is better not to talk about values if you don’t want to live them in the day-to-day. Walk the talk. They need the talk to be real. » – FG5 (managers) « Today’s young people are much less naive than the young people we used to be. We have to be very careful not to fall into cosmetics. » – FG5 (managers) « [A job] that makes sense, in the sense that it is in line with my values and also because I feel that I am useful, that there is interesting content. » – FG4 (students) «If the values [of the company] don’t fit me, I know it [the company] won’t fit me because I will be at odds with the very core of who I am. » – FG1 (students-workers) «I think it’s really important that the company’s values and mission are in line with my personal values. » – FG4 (workers)

Thirdly, participants in the illustrative research were sensitive to receiving fair and equal treatment from all stakeholders within the organization. Concomitantly, they also want to be recognized for their unique qualities and wish to have a career path tailored to their own needs. These results put in tension the notion of procedural organizational justice and recognition. Table 7.4 illustrates the tension with quotes from participants. To conclude this section, the proposed approach highlighted tensions that a responsible management approach, through its practices, needs to examine. Enabling a dialog between the different stakeholders through focus group discussions unveils these persistent contradictions and demonstrates on the one side, the complexity of implementing responsible practices. On the other, it highlights the difficulty of the measurement and evaluation of sustainability within organizations.

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Table 7.4  Illustrative quotes for the tension between procedural organizational justice and recognition Tension between procedural organizational justice and recognition

Illustrative quotes (our translation from French) «For me to come out of a Master’s course (...) and I feel (...) that I have a certain value and I expect it to be respected when I sign a contract. » – FG1 (students-workers) «I want to be paid what I am worth. » – FG1 (students-workers) « Recognition, it’s important to have some recognition when you do a job well, it boosts morale and helps you for the future. » – FG4 (workers)

7.7 Conclusion This chapter suggests a new way of approaching the issue of measuring sustainability by adopting a responsible management perspective. The latter is understood here as a social construct. Our work is based on a constructivist perspective and therefore considers responsible management as socially embedded, highlighting the fact that it is co-constitutive of the system of norms and beliefs of the organization and the society in which it operates (Abric, 2016). To measure sustainability, it is therefore essential to identify the social representations of responsible management in order to be able to measure its evolution in any given socio-economic context. We propose a concrete way to achieve this ambition by adopting a qualitative approach that has been empirically tested. We thus demonstrate the feasibility of this approach, and we wish to highlight in this concluding section the contributions of this approach in terms of measuring sustainability in our field. First of all, it should be noted that we are here in the field of management sciences and more particularly at the level of analysis related to management practices. Questioning the relevance of normative approaches (widely used in management) especially regarding sustainability, the proposed approach aims to identify the social representations of (some of) the stakeholders of responsible management enabling us to highlight some of its characteristics. It is imperative to take them into consideration, and to follow their evolution as long as the ambition of the measure is steering/development of sustainability (and not an end in itself). So, what do the data collected in this way tell us in terms of measuring responsible management (and thus sustainability)? We discuss here three ideas: contextualization, tensions, and dynamics. The order of citation does not reflect their relative importance. First of all, it is a matter of context. If there is no agreement on the academic level, there is no agreement on the empirical level either. The idea of universally valid indicators is therefore well and truly defeated in favor of a contextualized approach. This suggests that balanced score card-based approaches (well-focused

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on standard dimensions but contextually translated) may be more appropriate. From a sustainability perspective, this contextualization must mobilize the concerned actors, both in terms of buy-in on their part as well as a pragmatic anchor. The qualitative methodology used in our illustrative research is only one of the possibilities in this respect. Participatory (also called interdisciplinary) techniques are now strongly developing, which is fortunate from this point of view. Secondly, there is the existence of tensions within the representations of responsible management. It would be naive to believe that the pursuit of global performance can be carried out without tensions or contradictions. Sustainability, as enacted at the level of managerial practices, implies de facto tensions that need to be faced (and not ‘simply’ dealt with at the managerial level). The mainstream management perspective of avoiding or “managing” tensions seems to deny this aspect. Yet, these different tensions are very present in the social representations of responsible management, underlining the managerial skills needed to deal with them, particularly in terms of manager’s reflexivity as well as management system’s resilience. Thirdly, the dynamics at work and their temporalities are also a powerful element for measuring sustainability in terms of responsible management. While this is one of the most traditional limitations of management measurement tools, these are all the more important to consider in the field of sustainability as it involves lasting over time. Taking into account social representations makes it possible to highlight this anchoring in today’s socio-economic system as well as to integrate future projections (including those based on the past). Finally, considering these three elements as alternative for the measure of sustainability has concrete implications, both from the management researcher’s and the practitioner’s perspective as well as in terms of content and practice. Indeed, studying social representations of organizations and its management regarding sustainability highlights imperatives such as (procedural) organizational justice, balanced working conditions, need for recognition and consideration for tensions between autonomy and control that together deepen our understanding of responsible management. Social representations allow us to grasp the evolution required to bridge the gap between what is said in terms of sustainability and the reality of the actors but also, and particularly, the dissonance between organizations’ discourses and enacted practices. There is an urgency for concrete investigation of this alternative approach (Cullen, 2020), beyond declarations of intent and principles (in terms of managerial practices). Indeed, “there is still a theory-practice gap” (Hibbert & Cunliffe, 2015, p. 179). The tensions that arose in our illustrative research demonstrate the complexity of this alternative path. It highlights how sustainability and responsible management can be paradoxical and its measurement an intricate question where a qualitative approach can be an element in furthering its comprehension.

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References Abric, J. (2016). Pratiques sociales et représentations. Presses Universitaires de France. Alcaraz, J.  M., Wiktoria Marcinkowska, M., & Thiruvattal, E. (2011). The UN-principles for responsible management education. Journal of Global Responsibility, 2(2), 151–169. https:// doi.org/10.1108/20412561111166021 Audebrand, L. (2018). Le management responsable: Une approche axiologique. Presses de l’Université Laval. Brightman, J. (2003, mai). Mapping methods for qualitative data structuring (QDS). Paper presented at IOE Conference. Bruce, B.  C., Connell, J.  M., Higgins, C., & Mahoney, J.  T. (2011). The discourse of management and the management of discourse. International Journal Strategic Change Management, 3(1/2), 141–154. Carroll, A., Adler, N., Mintzberg, H., Cooren, F., Suddaby, R., Freeman, R. E., & Laasch, O. (2020). What “are” responsible management? A conceptual potluck. In O. Laasch et al. (Eds.), The Reseach handbook of responsible management (pp. 56–72). Edward Elgar Publishing. Creswell, J. W., & Poth, C. N. (2016). Qualitative inquiry and research design: Choosing among five approaches. Sage publications. Cullen, J.  G. (2020). Varieties of responsible management learning: A review, typology and research agenda. Journal of Business Ethics, 162(4), 759–773. Dupuis, J.-C. (2007). Le management responsable comme modèle de gestion de l’obsolescence morale. La Revue Des Sciences de Gestion, 1(223), 131–135. https://www.cairn.info/revue-­ etudes-­2003-­11-­page-­475.htm Dyllick, T. (2015). Responsible management education for a sustainable world. Journal of Management Development, 34(1), 16–33. https://doi.org/10.1108/JMD-­02-­2013-­0022 Ergene, S., Banerjee, S.  B., & Hoffman, A.  J. (2021). (un)sustainability and organization studies: Towards a radical engagement. Organization Studies, 42(8), 1319–1335. https://doi. org/10.1177/0170840620937892 Farr, R. (1993). Theory and method in the study of social representations. In D.  Canter (Ed.), Breakwel G (pp. 15–38). Oxford Sciences Publications. Gachassin, B., Labbé, S., & Mias, C. (2013). Les étudiants face à la professionnalisation à l’université: Exemple en sciences de l’éducation. Recherche et Formation, 73(2), 37–56. https://doi.org/10.4000/rechercheformation.2087 George, G., Howard-grenville, J., & Howard-grenville, J. (2016). Understanding and tackling societal grand challenges through management research. Academy of Management Journal, 59(6), 1880–1895. Gherardi, S., & Laasch, O. (2021). Responsible management-as-practice : Mobilizing a Posthumanist approach. Journal of Business Ethics. Guillemette, F., Luckerhoff, J., & Baribeau, C. (2010). Entretiens de groupes: concepts, usages et ancrages I. Recherches Qualitatives, 29(1), 1–4. Hibbert, P., & Cunliffe, A. (2015). Responsible management: Engaging moral reflexive practice through threshold concepts. Journal of Business Ethics, 127(1), 177–188. https://doi. org/10.1007/s10551-­013-­1993-­7 Kalampalikis, N. (2011). Un outil de diagnostic des représentations sociales: le focus group. Revista Diálogo Educacional, 11(33), 435–467. Laasch, O., & Conaway, R. (2014). Principles of responsible management: Global sustainability, responsibility, and ethics. Cengage Learning. Laasch, O., Suddaby, R., Freeman, R.  E., & Jamali, D. (2020). Mapping the emerging field of responsible management: Domains, spheres, themes, and future research. In O.  Laasch et  al. (Eds.), The Reseach handbook of responsible management (pp.  2–39). Edward Elgar Publishing.

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Moscovici, S. (1976). La psychanalyse, son image et son public, Paris : PUF. Nonet, G., Kassel, K., & Meijs, L. (2016). Understanding responsible management: Emerging themes and variations from European business school programs. Journal of Business Ethics, 139(4), 717–736. https://doi.org/10.1007/s10551-­016-­3149-­z Székely, F., & Knirsch, M. (2005). Responsible leadership and corporate social responsibility: Metrics for sustainable performance. European Management Journal, 23(6), 628–647. https:// doi.org/10.1016/j.emj.2005.10.009 van Marrewijk, M., & Werre, M. (2003). Multiple levels of corporate sustainability. Journal of Business Ethics, 44(2–3), 107–119. Charlotte Durieux is working as a PhD candidate at ICHEC Brussels Management School and at UCLouvain  (Belgium). Her PhD project aims to study management practices in the context of servitization with the perspective of responsible management.  

Marine De Ridder works as a postdoctoral researcher at ICHEC Brussels Management School (Belgium). Her PhD thesis aimed at exploring dark sides of self-proclaimed “liberated firms”, rooted in Critical Management Studies (UCLouvain). Her current research topics are posthumanist organizing and responsible management.  

Anne Rousseau holds a Phd in Management Science. She is professor at ICHEC Brussels Management and UCLouvain and co-director of the Chair in Innovative Management Practices. Her research focuses on responsible management in a practice-­based approach.  

Alain Ejzyn is Professor in Digital Strategy and Information Security at ICHEC Brussels Management and co-director of the Chair in Innovative Management Practices.  

Frederik Claeyé is an Associate professor at ICHEC Brussels Management School (Belgium). He obtained his PhD from Middlesex University Business School (London, UK) and his current research topics focus on responsible management and entrepreneurship in conditions of extreme poverty.  

Chapter 8

Stakeholder Engagement and Materiality Assessments in Sustainability Reporting Mia Kaspersen

and Thomas Riise Johansen

Abstract  Discussions about sustainability accounting and accountability tend to focus on sustainability reports. However, it is important not to view sustainability reports in isolation from the context in which reports are prepared. We propose that more attention is directed towards the organisational processes that shape the content and orientation of sustainability reports. Such processes might involve engagement with stakeholders to identify the matters of concern. Reporting organisations might also conduct materiality assessments to identify what is deemed material and important to report. We review the literature in these areas and substantiate why companies, professionals, and policymakers in the sustainability reporting arena need to recognise that the way in which standards and regulations drive report content differ for sustainability reporting compared to financial reporting. The chapter ends with an outline of research opportunities that shed further light on the role of stakeholder engagement and materiality assessments as underlying processes for sustainability reporting.

8.1 Introduction The number of companies that engage in sustainability reporting activities continues to rise (KPMG, 2020). But despite this growing interest, the quality of sustainability reports remains unsatisfactory, and sustainability reporting has attracted widespread criticism. Sustainability reports are characterised by low levels of transparency, completeness, and credibility, resulting in an inadequate discharge of accountability to civil society and fulfilment of user needs (Adams, 2004; Kahn et al., 2021; Michelon et al., 2015).

M. Kaspersen (*) · T. R. Johansen Copenhagen Business School, Frederiksberg, Denmark e-mail: [email protected]; [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Kacanski et al. (eds.), Measuring Sustainability and CSR: From Reporting to Decision-Making, Ethical Economy 64, https://doi.org/10.1007/978-3-031-26959-2_8

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These shortcomings manifest themselves in several ways. For example, reports include mostly irrelevant information and lack focus on “explicit objectives … and results and outcomes of firm’s plans” (Michelon et al., 2015, p. 70). Other scholars question approaches to calculation and measurement. In a study of disclosure of indirect and direct emissions among energy companies, Talbot and Boiral (2018) found limited information regarding measurement methods, which undermine the interpretation, use, and credibility of reported data. That study also documented substantial shortcomings regarding reporting of scope 1, 2, and 3 emissions. These included omissions of indirect emissions and wrong categorisation of emissions across the three scopes, which ultimately obfuscate the reported information. In a counter-accounting study of leading sustainability report preparers, Macellari et al. (2021) examined the extent to which negative events were included in reports and found that such events were largely completely or partly omitted from the examined reports. For example, this included non-disclosures, vague or boilerplate disclosures about health and safety issues in local communities, employees’ harsh living and working conditions, and environmental accidents. Incomplete reports and the lack of balanced presentation question whether sustainability reports contain material information to users. Such shortcomings can partly be explained by a lack of regulation and detailed guidelines that ultimately leaves decisions about information to be either included or excluded from reports in the hands of management. Despite an increasing number of sustainability reporting guidelines and regulations of non-financial reporting (e.g., in the EU), the details and precision of sustainability reporting regulation have not reached a level that is even close to how financial reporting is regulated. Therefore, if sustainability reporting mimics financial reporting without being regulated in the same manner as financial reporting, companies can largely decide which aspects of company activities are to be made visible and which aspects are to remain invisible (Gray & Laughlin, 2012, p. 232). In financial reporting regulation, stakeholder concerns are to a great extent dealt with at the standard-setting level. Standard-setters, such as IASB, reach out to especially investor communities, carry out consultations to substantiate regulation change and issue standards that in detail regulate recognition and measurement as well as disclosures in the financial statements. Thus, in the processes underpinning financial reporting regulation, there are considerable stakeholder (investor) engagement and detailed processes of assessing what is material to the users. In contrast, sustainability reporting regulation is more high level, and without further consideration, sustainability reporting could be rather inward-looking, as argued above. Scholars and, to some extent, practitioners and sustainability reporting guidelines have suggested thorough stakeholder engagement at the company level to raise the understanding of stakeholder expectations and key areas of concern that should be addressed in sustainability reporting. Furthermore, materiality assessments have been put forward as a necessity to conduct alongside stakeholder engagement to obtain an in-depth understanding of the subject matters that need to be reported and how they should be reported.

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In this chapter, we take a closer look at stakeholder engagement and materiality assessment processes. These are two fundamental and closely intertwined aspects of sustainability reporting and can potentially provide a substantial contribution to the quality of sustainability reporting and the achievement of a more balanced representation of company activities according to user needs.

8.2 Stakeholder Engagement Prior research has consistently called for comprehensive and high-quality stakeholder engagement to be placed at the core of sustainability reporting (Adams, 2004; Barone et al., 2013; Bellucci et al., 2019; Høvring et al., 2018; Manetti, 2011; Moneva et al., 2006; Moratis & Brandt, 2017; Rasche & Esser, 2006; Thomson & Bebbington, 2005) and guidelines have recommended that stakeholders are involved in sustainability reporting processes (AccountAbility, 2015; GRI, 2021b). Sustainability accounting scholars generally relate stakeholder engagement with accountability to stakeholders. In this sense, the engagement revolves around the notions of stakeholder democracy and democratic governance and is focused on the dual need for stakeholders to receive adequate accounts and to have the possibility to affect corporate decision-making (O’Dwyer, 2005; Johansen, 2010). Stakeholder engagement in this form is more than a “unilateral management of stakeholders” (Manetti, 2011, p. 111) and embraces the legitimate stakeholders with whom the company has a moral relationship (Greenwood, 2007) and to whom the company is responsible (O’Riordan & Fairbrass, 2014). Therefore, Dillard and Vinnari (2019) suggest that the process takes its beginning “with the identification of the various interested constituencies and a determined recognition of the pluralistic nature of their information needs” (p. 21). For the process of stakeholder engagement itself, it is deemed essential that stakeholder engagement is conducted as a democratic interaction (Bellucci et al., 2019) that takes the form of a two-way dialogue (Bebbington et al., 2007) where each stakeholder is offered a voice (Brown, 2009). Ideally, this dialogue is free from pre-determined problems allowing perceptions and approaches to sustainability to be challenged in a process of mutual learning. As for the link with sustainability reporting, this engagement can be seen as a precondition for assessing materiality and thereby conditioning the content of sustainability reporting (Greenwood & Kamoche, 2013; Høvring et al., 2018; Rasche & Esser, 2006). However, reaching this ideal is not without problems, and the execution of stakeholder engagement often falls far from this ideal (Høvring et al., 2018). It has been questioned if it is at all possible to reach “consensus without exclusion” (Mouffe, as cited in Tregidga & Milne, 2022, p. 3) and whether it is realistic to have an open-­ minded dialogue between stakeholders and management without the exercise of power (Johansen, 2008). In other words, stakeholder engagement is a complex matter associated with “potential challenges, dilemmas, and tensions” (Høvring et al., 2018, p. 629). Tregidga and Milne (2022) provide examples of such obstacles that

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obscure the accomplishment of shared value creation and consensus in stakeholder engagement. Studying a dispute between a coal mining company and its stakeholders, they show how different constructions of the dispute complicate the achievement of a common understanding. They also address how the relationships between the constructed identities of the parties involved result in some parties mutually accepting each other in the engagement process while other voices are ignored and not recognised. These aspects are decisive for who is perceived as legitimate participants in the process and who might influence what is to be included as valid stakes in the engagement and reporting. Although stakeholder engagement is considered vital in report preparation processes, studies of stakeholder engagement often suggest that, at best, limited stakeholder engagement underpins the preparation of sustainability reports (Cooper & Owen, 2007; Greenwood & Kamoche, 2013; Høvring et  al., 2018; Kaspersen & Johansen, 2016; Manetti, 2011; Owen et al., 2000; Skouloudis et al., 2010; Tregidga & Milne, 2022; Venturelli et al., 2018). While some sort of engagement is identified, the approach adopted by companies towards their stakeholders is fragmented and controlled by management (Bellucci et  al., 2019). Two-way dialogues between companies and stakeholders are generally identified as missing, and too often, stakeholder engagement attempts are seen as “a monologic process of information giving and information gathering rather than a genuine stakeholder dialogue” (Høvring et  al., 2018, p.  640; see also, e.g., Belal & Owen, 2007; Dey, 2007; Greenwood & Kamoche, 2013). These findings suggest that stakeholder engagement is not shaped as democratic dialogue and that such activities are used as a tool to legitimise corporate behaviour (e.g., Ardiana, 2019; Barone et al., 2013; Manetti, 2011) rather than, as suggested by Cooper and Owen (2007), being a necessary part of stakeholder accountability.

8.3 Materiality Assessment Materiality in sustainability reporting is concerned with identifying those issues that have “the most significant impacts on the economy, environment, and people” (GRI, 2021b, p. 4) for stakeholders to make informed assessments of company activities (GRI, 2021a). It is about assessing organisational activities to determine impacts that are to be included or excluded and how they are represented when sustainability reports are made. As seen in the GRI understanding of materiality, the perspective from which this assessment is made is to be developed from an understanding of how the information relates to stakeholder decision-making and how a ‘true and fair view’ of impacts can be developed. This view on materiality is shared among scholars and in guidelines of sustainability reporting (AccountAbility, 2018; Etzion & Ferraro, 2010; GRI, 2021a; Hsu et al., 2013; Machado et al., 2021; Torelli et al., 2020; Unerman & Zappettini, 2014; WBCSD, 2021). Materiality seems to be a clear and straightforward concept. However, the threshold between inclusion and exclusion of report content has been stated as unclear,

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and the notion of materiality has been described as fuzzy (Hsu et al., 2013), elusive (Edgley, 2014), and vague (Canning et  al., 2019; Sepúlveda-Alzate et  al., 2022). The transferability of the materiality concept in financial reporting to the role of materiality in sustainability reporting may be part of the problem. While the notion of materiality in sustainability reporting has been adopted from financial reporting, the term has been reconceptualised and arguably plays a different role in sustainability reporting than it does in financial reporting. First, since what is to be included in reports is largely regulated in a financial reporting context, materiality is often concerned with assessing the significance of misstatements that thwarts informed decision-making of financial statement users. Thus, in financial reporting, materiality is generally used as a quantitative threshold representing the acceptable sum of unadjusted errors (i.e., misstatements) for financial statements to be seen as providing a true and fair view. In contrast, the limited specification of content in sustainability reporting orient the materiality assessment to be primarily concerned with omissions of information that might influence stakeholder decisions. Second, users of financial reporting are primarily seen as being shareholders, while sustainability reporting users are considered to be stakeholders in a broader sense (Bebbington & Larrinaga, 2014; Edgley et al., 2015; Onkila et al., 2014; Puroila & Mäkelä, 2019), which expands the range of impacts to report. In light of these differences, materiality assessments in sustainability reporting are by no means a simple task (Calabrese et al., 2016; Gray, 2001; Torelli et al., 2020). Canning et al. (2019) argue that decisions about materiality are further complicated as sustainability report preparers and users rarely distinguish between relevant and irrelevant information in the same manner and because the understanding of what is material is likely to be heavily informed by actors’ motivations. More recently, the European Commission (2019) has introduced the concept of double materiality to acknowledge that there may be two overarching perspectives on materiality in sustainability reporting: (a) financial materiality and (b) environmental and social materiality. The intention is to meet the information needs of both investors and a broader stakeholder audience (WBCSD, 2021, p.  12). However, Adams et al. (2021) emphasise that “it is not about the convergence of the two perspectives that renders an issue as material. Impacts on the environment and society cannot be deprioritized on the basis that they are not financially material, or vice versa. Moreover, a company should start with the assessment of the outward impact component of the double-materiality principle followed by the identification of the subset of information that is financially material to the company and their stakeholders” (p.  2). This necessitates stakeholder engagement, and the presence and shape of such engagement are tied to the operationalisation and scope of materiality. Companies often approach materiality assessments in sustainability reporting using a matrix to frame the identification and prioritisation of issues (Puroila & Mäkelä, 2019). However, beyond that, there is less structure and assessments are predominantly subjective (Calabrese et al., 2016) and flexible processes that ultimately lead to diverse ways of determining and presenting materiality among companies (Farooq & de Villiers, 2019; Lai et al., 2017; Puroila & Mäkelä, 2019). In this regard, the guidance on materiality assessments offered in guidelines is not

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considered to encourage a more uniform approach (Edgley et al., 2015; Lai et al., 2017; WBCSD, 2021). Making materiality assessments and stakeholder engagement visible to outsiders is important given the limited pre-defined report content in regulation and because companies might adopt a diverse range of approaches to these processes. Company disclosures regarding the execution of materiality assessment and stakeholder engagement are, however, repeatedly found to be deficient, providing limited or no information about how such processes are performed (Adams et al., 2021; Beske et al., 2020; Farooq et al., 2021; Guix et al., 2018). Without this information, it is difficult, if not impossible, to fully understand the balancing between reported and omitted issues. This raises the concern that sustainability reporting is largely informed by a managerial focus and the strategic selection of information, implying that reports tend to be biased towards issues of a more positive character (Adams et al., 2021; Machado et al., 2021; Onkila et al., 2014). It may be harsh to conclude that this is “a clear trend towards organizational narcissism” (Boiral, 2013, p. 1061; see also, e.g., Adams, 2004), but it is clear that if no stakeholders are engaged in materiality assessments, internal interests will arguably dominate these processes. To address the quality of sustainability reports, we suggest that the questions below concerning stakeholder engagement and materiality assessment processes are relevant to consider in the report preparation process. Likewise, providing an account of these processes is relevant for report users to be able to assess the report quality: • Which stakeholders participated in the stakeholder engagement? • How were stakeholders selected? • What was the form of stakeholder engagement, and what was the scope (breadth and depth)? • Which stakeholders are considered as target groups for the report? • Who participated in the materiality assessment process? • How was the materiality assessment structured, and how was it linked to stakeholder engagement? • Which themes and issues emerged from the processes? • Which themes and issues have been excluded from the report?

8.4 Research Opportunities Empirical studies on stakeholder engagement and materiality assessment processes in the production of sustainability reports are few, and this calls for more research (e.g., Bellucci et  al., 2019; Farooq & de Villiers, 2019; Høvring et  al., 2018; Unerman & Zappettini, 2014). A better understanding of stakeholder engagement and materiality assessment processes is important from practice and research perspectives.

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From a practitioner perspective, these elements seek to substantiate report content and balance information, leading to better information for stakeholders. Although stakeholder engagement and materiality assessment are emphasised in guidelines as fundamental for sustainability reporting, these aspects are repeatedly found to be neglected by report preparers, and more emphasis on these matters is needed. The development of sustainability reporting has been largely voluntary, and if reports are to be more useful to stakeholders, an approach could be to develop more prescriptive regulation regarding engagement and materiality and/or to develop more specific disclosure requirements. As a minimum, regulation should support the need to receive information that allows stakeholders to evaluate the quality of report content, including whether important aspects are omitted. This includes information about stakeholder engagement and materiality assessment processes. In consultations with report preparers and users held by the European Union (2021), report users expressed a preference for “detailed and comprehensive reporting requirements” (p.  8). On the other hand, preparers tended to prefer “to retain a large degree of discretion about what to report and how to report it” (p. 8). As mentioned above, the context in which sustainability reports are produced has received limited attention in research, implying that the conditions under which sustainability reports are prepared would be a valuable avenue of research. It would further be relevant to explore how companies can be made more accountable for stakeholder engagement and materiality assessments and how such efforts could improve report quality. Likewise, the role of the assurer in these processes would be interesting to explore, including whether the assurer impacts and/or facilitates processes. More insight into how the assurer uses information about stakeholder engagement and materiality assessment in the assurance process is also needed. In general, to better understand sustainability reporting, we argue that attention is directed towards the role that reporting processes play in the production of sustainability reports. Thus, future research should examine the backstage of stakeholder engagement and materiality assessment processes and expose the considerations and motivations underlying sustainability report preparation. In addition, since stakeholder engagement and materiality assessment are complex tasks, more normative research on how these processes can be operationalised in a company context, including action research or similar, would be valuable.

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Unerman, J., & Zappettini, F. (2014). Incorporating materiality considerations into analyses of absence from sustainability reporting. Social and Environmental Accountability Journal, 34(3), 172–186. https://doi.org/10.1080/0969160X.2014.965262 Venturelli, A., Cosma, S., & Leopizzi, R. (2018). Stakeholder engagement: An evaluation of European banks. Corporate Social Responsibility and Environmental Management, 25(4), 690–703. https://doi.org/10.1002/csr.1486 World Business Council for Sustainable Development (WBCSD). (2021). The reality of materiality: Insights from real-world applications of ESG materiality assessments. Retrieved from: https://www.wbcsd.org/contentwbc/download/12378/184755/1 Mia Kaspersen is Associate Professor at the Copenhagen Business School. Her research has focused on non-financial and sustainability accounting and reporting addressing, in particular, the systems and processes that underlie these forms of accounting and external disclosures.  

Thomas Riise Johansen is FSR Endowed Professor at the Copenhagen Business School. His research has focused on sustainability accounting and accountability. He has also focused on disclosures in annual reports and the role of regulation, regulators, oversight and enforcement in accounting and auditing.  

Chapter 9

The Performance-Reporting Gap: A Key to Understanding the Relevance of Sustainability Reporting Information to Stakeholders Magnus Frostenson

Abstract  There is a vague relationship between corporate sustainability performance and reporting. In this contribution, this is discussed in terms of a ‘performance-­ reporting gap’. The gap is described and analyzed as problematic from an information use and relevance perspective and from an internal sustainability control perspective. An overarching consequence of the gap is that the quality and usability of information in sustainability reports depend on how companies treat the gap. In addition, the gap reflects underdeveloped processes of sustainability control in companies. It is suggested that the gap could be narrowed through clearer accountability structures and controllable sustainability processes within firms, more sophisticated materiality analyses and relevant strategic planning and pursuit of reporting processes.

9.1 Introduction The problematic relationship between sustainability performance and sustainability reporting has been observed and problematized for a long time (e.g. Patten, 2002; Adams, 2004; Clarkson et al., 2008; Hummel & Schlick, 2016). Behind such studies lies the (sometimes) implicit assumption that reporting is a tool that should reflect the underlying achievements of the firm and provide a relevant image of its impact on the economy, the environment and society. In various ways, researchers point to a gap between what the company reports and ‘reality’, often in the sense of M. Frostenson (*) Department of Welfare, Management and Organisation, Østfold University College, Halden, Norway Örebro University School of Business, Örebro, Sweden e-mail: [email protected]; [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Kacanski et al. (eds.), Measuring Sustainability and CSR: From Reporting to Decision-Making, Ethical Economy 64, https://doi.org/10.1007/978-3-031-26959-2_9

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what the company achieves or how it performs in terms of sustainability. To Adams (2004), there is a ‘reporting-performance portrayal gap’ understood as a measure of the extent to which an organization is accountable to its stakeholders. Even though the gap can be understood somewhat differently, the relationship between corporate sustainability performance and sustainability reporting can be discussed. The existence of such a gap is obvious. In this contribution, the gap will be referred to as the ‘performance-reporting gap’. The purpose of the contribution is to discuss and problematize the gap and to suggest some solutions about how to narrow it. It will be argued that the gap is problematic for at least two reasons. First, there is an information user perspective which requires useful and relevant corporate information on sustainability. Second, from a control perspective, the gap reveals inadequate or lacking structures of sustainability control within the company. In other words, the focus of the chapter is on the relationship between actual sustainability performance and the information given in sustainability reports, that is processed within the reporting organization. Structurally, the chapter starts with a description of the performance-reporting gap. Then, the two problematic aspects of the gap are focused, followed by a concluding discussion containing some suggestions about how to deal with the gap.

9.2 The Performance-Reporting Gap Sustainability reporting is now legally required in many countries, for example within the EU (Camilleri, 2015). Still, it is fair to say that such reporting is to a high degree an autonomous exercise, building on discretionary judgement of what to report. Legal texts generally prescribe the overarching contents and sometimes also forms of sustainability reporting. Legislation may mandate reporting on, for example, risks, structures and policies regarding environmental issues, diversity, gender equality and human rights. That does not mean, however, that legislation necessarily details what and how to report. Rather, it is to a high degree up to the reporting organization to decide, even though organizations that report according to the GRI Standards are expected to perform meticulous materiality analyses to identify prioritized issues in the reports. The very notion of sustainability reporting builds on the premise that the sustainability impact of the organization is somehow identified, measured, or described. As the Global Reporting Initiative (GRI) puts it in its definition: “Sustainability reporting, as promoted by the GRI Standards, is an organization’s practice of reporting publicly on its economic, environmental, and/or social impacts, and hence its contributions  – positive or negative  – towards the goal of sustainable development” (GRI, 2016, p. 3). The issue concerns visualizing what organizations do in terms of sustainability, and the consequences thereof. The terms ‘impact’ and ‘contributions’ are vague, but still relate to various kinds of performance. The organization achieves something that is to be reported.

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Whatever the case, the reporting organization should provide information that reflects sustainability performance. In reports, specific activities, processes, and outputs are translated, not necessarily into pecuniary categories, but often into quantitative terms. It goes without saying that such an exercise is problematic. The problem is not only one of measurement and calculation, but also a choice between which sustainability aspects to report on. Confusion may prevail as to which sustainability achievements that should be prioritized. In some cases, one can expect that companies prefer not to expose negative information. It may be the case that the reporting organization simply does not want to report on certain sensitive issues. Another aspect is knowledge, how to draft a report of high quality requires competence and is usually a costly exercise. Due to lacking knowledge or other reasons, an organization may also understate relevant practices and underreport positive sustainability impact (Johnstone, 2018). For various reasons, thus, it is not necessarily the case that companies report on what is genuinely relevant from a sustainability performance perspective. The discussion reveals a ‘gap’ between sustainability performance and reporting. A reasonable label for such a fuzzy relationship is the ‘performance-reporting gap’. It relates to the non-synchronized practices of performing and reporting on sustainability. How and why the gap arises is an open question. We still lack knowledge about how, for example, GRI principles are followed and shape the preparation processes of sustainability reports (Pérez-López et  al., 2015) Or as Pérez-López et al. (2015, p. 730) write: “In addition to potentially signalling a lack of interest in sustainability performance, priority to external pressures might have overlooked /…/ technical and organizational elements that would be needed in order to integrate SR (sustainability reporting) into corporate sustainability practices. Thus, within this configuration, the role of SR appears to be limited to externally communicating sustainability information.” Others point to the motives of the reporting organization. Hummel and Schlick (2016), for example, see the relationship between performance and reporting as ambiguous. Superior sustainability performers tend to signal their success to the market through high-quality sustainability disclosure, in line with voluntary disclosure theory, whereas poor performers disguise their shortcomings through low-quality disclosures to protect their legitimacy. Earlier studies have come to somewhat other conclusions and the picture is mixed (Clarkson et al., 2008). Patten (2002), for example, noted that highly polluting firms also tended to disclose more about this in their reports compared to others. One clue to understanding the somewhat inconsistent results is that in many cases the expectations of stakeholders on what to report are essential. That is, external factors and expectations affect reporting more than internal considerations. Implicitly, such studies point to sustainability reporting as a discretionary activity with substantial autonomy when it comes to choosing what to report. Compared to financial reporting, sustainability reporting is more discretionary, and also guided by external stakeholder expectations. To judge from research, the performance-­ reporting gap is real and problematic. In the following, two aspects will be highlighted. The first has to do with the information users and the relevance of the

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reported information. The second is related to the sustainability control ambitions of the reporting company.

9.3 The Gap from an Information User Perspective A rather obvious function of sustainability reporting is that it should provide relevant information to the stakeholders interested in using it for various purposes, such as investment decisions according to sustainability criteria (cf. O'Dwyer et  al., 2005). Within financial reporting, an overall objective is to provide information that is useful to users for decisions of various kinds (cf. Georgiou et al., 2021). The same decision-usefulness perspective is applicable within sustainability reporting (e.g. Du Rietz, 2014). In sustainability reports, information must be sufficient, reliable, and relevant. It must also be directed to relevant constituents, corresponding to their needs. Perhaps it is self-evident that sustainability information should be relevant. But fair to say, the question of what constitutes relevant information has to a high extent been left to the discretion of the reporting organizations themselves. It is the reporting organization that performs the materiality analysis used to identify material topics in the sustainability report. An obvious risk is the choice of reporting less relevant information. This is also a choice that conditions the value of the information. Irrelevant information is simply not used by the stakeholders (Adams, 2004). Rather, they may prefer to gather it from other external sources that the company does not control. Why sustainability information becomes less relevant has to some extent already been discussed in this contribution, for example the unwillingness to provide negative information. The relatively wide mandate of companies to choose what they want to report opens possibilities for selecting specific issues to visualize. But notably, one aspect is that the frequently separated structures of report preparation, information gathering and responsibility for the underlying processes cause a mismatch that often impacts the relevance of the information in sustainability reports (see, for example, Frostenson & Helin, 2017). Which information to provide, in which format, and so on, may be uncoordinated and less strategically determined. Apart from such internal aspects, however, knowledge of stakeholder needs and priorities becomes a central issue for providing relevant and adequate information. The relevance of sustainability information is also to be judged by the information users. One could even say that it should preferably be co-created in a process where the users are active and adjudicate the relevance on their own behalf. Through conscious discernment, stakeholder dialogue and informed choice, companies have the possibility to focus their reports on the most relevant issues to be communicated to the stakeholders. As Andon et  al. (2015, p.  987) put it: “As such, accounting information is a practical accomplishment constituted in situ. It is crafted by users in such a way that it is good enough to enable the kinds of decisions confronting them. This implies that a push to prescribe and mandate particular forms of accounting information on the basis of its presumed decision usefulness is misguided and

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sits uncomfortably with the ability of practitioners to acknowledge and accommodate the operational character of accounting information”. Usefulness, that is, is something that is created in a dialogue. Sustainability reporting depends on dialogue with stakeholders to understand the relevance and usefulness of sustainability information. If that dialogue does not exist or is of low quality, the consequence will be lacking relevance. In addition, stakeholders such as analysts and investors have their own schemata through which they evaluate the relevance of the information. As Du Rietz (2014, p. 403) writes: “An issue for the analyst teams, particularly asset managers and service providers, is that their informing process captures large amounts of irrelevant accounts.” Ultimately, the users themselves can never be excluded from judging the usefulness accounting information. The issue of information use and relevance is perhaps the main aspect of why the performance-reporting gap is a problem. The larger the gap, the less relevant the information gets. Notably, even if the problem of relevance has to do with usefulness to investors and others, it is also one of superfluousness and information overload. Sustainability information of less relevance tends to be found in other sources, either in other reports or forms of communication. Unnecessary information provision does not increase the quality of information, just the quantity. Significantly, the now replaced GRI Standards core and comprehensive alternatives for how much to report were never intended to discriminate between sustainability reports in a qualitative sense, but rather an indication of quantity. Despite that, long and partly unnecessary sustainability reports still exist.

9.4 The Gap from a Corporate Reporting and Control Perspective The performance-reporting gap also concerns the issue of sustainability control. The connection between reporting and the management control systems of the organization, sometimes specified as sustainability control systems (see e.g. Johnstone, 2019), tends to be vague. The frequently missing control structures, incentives, and organization of sustainability work have repercussions on what can be reported. Existing figures and information of less relevance are used and find their way into the sustainability report since relevant data cannot be found in the management control systems. Sustainability control implies more than establishing KPIs and measuring. It is also a question about designing adequate control and accountability structures within the firm. Compared to financial reporting, it is obvious that sustainability reporting tends to build on a weaker synchronization with the control and accounting systems of the organization. It may be that practices and understandings of sustainability performance are underdeveloped and not related to the preparation process of the sustainability report (Pérez-López et  al., 2015). Within the

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organization, there may be lacking understandings of what sustainability performance is or how practices for measuring such performance are created. Vague structures, lacking targets, fuzzy accountability, as well as limited knowledge of the nature and relevance of sustainability issues may all contribute. In other cases, such practices and structures do exist, but figures or information may still be hard to collect. In other words, one aspect of the performance-reporting gap is the existence of inadequate control structures within the organization. An ‘architecture of accountability’ is necessary within the organization that clearly defines who is accountable and for what. Input, causal processes and output relating to sustainability performance must be identifiable. If so, it is easier to report on actual performance. This issue is closely related to the principle of controllability (Merchant, 1987; Merchant & Otley, 2007; Burkert et al., 2011). Shortly put, the controllability principle states that managers should be held accountable only for achievements and results that they have the possibility to influence (Merchant, 1987; and many others). Designing control structures that allow for accountability and controllability is crucial if one has the ambition of identifying performance to report. If one can relate sustainability performance to business units, departments or even individuals, sustainability performance is easier to report on. Without such structures, it becomes a more difficult task to identify performance on various levels. Often, however, the control structures are underdeveloped and vague for a number of reasons. Among these one finds vague formulations (or absence) of sustainability targets, unclear responsibility allocation within the firm, lacking incentives, and sometimes even a lack of interest (although less common in contemporary business). Relevant in a control context is also the nature and depth of the materiality analysis. Even though certain topics are of interest and relevance to the company and its stakeholders, the mere identification of them does not contain a connection to the sustainability control systems of the reporting organization. The understanding of the issues is not linked to processes and specific performance, objectives, targets or how to perform to reach those targets. Another way of putting it is that the question of identifying material sustainability aspects is decoupled from the process of working with them. A related issue is also the timing of reporting and the nature of the reporting cycle. The sustainability reporting process is to a large extent a retrospect phenomenon. What to report is decided when the sustainability report preparations start, often at the end of the income year (Frostenson & Helin, 2017). The problem of such a process is that the reporting organization does not necessarily know from the outset what is to be reported and why. If so, there is a missing link between reporting and the processes of sustainability control. If there is no link and the one precedes the other (control and then reporting), the processes are detached and the relevant sustainability information not necessarily gathered or identified during the reporting cycle. Strategic planning and seeing reporting as a ‘going concern’ rather than a ‘retrospect exercise’ is a way of reducing the gap.

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9.5 Discussion and Suggestions The ‘performance-reporting gap’ is problematic since it decouples reporting from sustainable business realities. As shown, there are aspects of both information relevance and control related to this problem. The larger the gap, the less relevant the accounting information tends to be for stakeholders. It is also a sign of lacking or inadequate control structures within the firm. One may locate the problem to the firm level. But reasonably enough, it is also worth asking the question whether legislation is partly to blame since it is biased towards reporting rather than performance. In recent years, reporting rather than performance has become the fundamental sustainability-related issue for companies, following legislation within the EU. Reporting has become a ‘technology’ that politicians and lawmakers see as instrumental to sustainability performance. Reporting, thus, precedes performance from a legal perspective, which can be said to twist the relationship between the two. Overstating the capacity of reporting to drive or at least highlight performance is not necessarily a fruitful thing to do. Still, the performance-reporting gap is also a micro-level issue for which firms are responsible. How the gap is treated becomes an issue for every reporting organization. In general, a good idea is to try to close it through taking some measures. Closing the gap involves a strategic and integrated use of reporting. Three aspects are worth emphasizing: accountability structures for sustainability with controllable input, process and output mechanisms, a thorough materiality analysis process, and, in addition, a reconsideration of the reporting cycle. Relevant reporting should reflect actual performance and the input, causal processes and output of the reporting organization. To do so involves not only the identification and measurement of relevant output, et cetera, but also the allocation of responsibility or accountability to corporate units, divisions, departments and in some cases individuals. Even through strict controllability is not always an option when it comes to sustainability performance, it is wise to analyze the input, process, and output relations to further understand the causality leading up to performance. Another way of putting it is to visualize the sustainability control structures of the company and to report in a way that reflects these. Control structures, thus, are adequate tools for improving sustainability and imply the identification of performance. As touched upon, the materiality analysis is of central importance when it comes to deciding what to report on. A problem with current materiality analyses, however, is that they tend to identify issues that are important to stakeholders and the reporting organization, but do not link these issues to processes or outcomes. Going beyond the overarching issues, and striving towards more specificity, process causality and concrete targets linked to the issues would be one way of making the materiality analyses deeper and more relevant. As they stand, materiality analyses often become a visualized matrix in a sustainability report without drawing any consequences of how to deal with the identified issues. In other words, more

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sophisticated materiality analyses are of want. Organizations such as the GRI could assist in developing more process- and outcome-oriented tools for that. Finally, strategic planning of the reporting cycle matters. If reporting becomes a retrospect exercise, where performance is ‘sought for’ rather than reported in a coherent and foreseeable way. That also increases the risk of ‘cherry-picking’ and selective use of information. Consistency when it comes to pursuing the reporting process is necessary. Identifying which processes and performance to report on beforehand is recommendable, and also to stick to that course. As the chapter shows, the ‘performance-reporting gap’ is an identifiable problem that reporting organizations can approach consciously. Even if it is not easily solvable, it is at least possible to tackle.

References Adams, C. A. (2004). The ethical, social and environmental reporting-performance portrayal gap. Accounting, Auditing, & Accountability, 17(5), 731–757. Andon, P., Baxter, J., & Chua, W. F. (2015). Accounting for stakeholders and making accounting useful. Journal of Management Studies, 52(7), 986–1002. Burkert, M., Fischer, F.  M., & Schäffer, U. (2011). Application of the controllability principle and managerial performance: The role of role perceptions. Management Accounting Research, 22(3), 143–159. Camilleri, M. A. (2015). Environmental, social and governance disclosures in Europe. Sustainability Accounting, Management and Policy Journal, 6(2), 224–242. Clarkson, P. M., Li, Y., Richardson, G. D., & Vasvari, F. P. (2008). Revisiting the relation between environmental performance and environmental disclosure: An empirical analysis. Accounting, Organizations and Society, 33(4), 303–327. Du Rietz, S. (2014). When accounts become information: A study of investors’ ESG analysis practice. Scandinavian Journal of Management, 30(4), 395–408. Frostenson, M., & Helin, S. (2017). Ideas in conflict: A case study on tensions in the process of preparing sustainability reports. Sustainability Accounting, Management and Policy Journal, 8(2), 166–190. Georgiou, O., Mantzari, E., & Mundy, J. (2021). Problematising the decision-usefulness of fair values: Empirical evidence from UK financial analysts. Accounting and Business Research, 51(4), 307–346. GRI. (2016). GRI 101: Foundation 2016. Global Reporting Initiative. Hummel, K., & Schlick, C. (2016). The relationship between sustainability performance and sustainability disclosure – Reconciling voluntary disclosure theory and legitimacy theory. Journal of Accounting and Public Policy, 35(5), 455–476. Johnstone, L. (2018). Theorising and modelling social controls in environmental management accounting. Social and Environmental Accountability Journal, 38(1), 30–48. Johnstone, L. (2019). Theorising and conceptualising the sustainability control system for effective sustainability management. Journal of Management Control, 30(1), 25–64. Merchant, K. A. (1987). How and why firms disregard the controllability principle. In W. J. Burns & R. S. Kaplan (Eds.), Accounting and management: Field study perspective (pp. 316–338). Harvard Business School Press. Merchant, K. A., & Otley, D. T. (2007). A review of the literature on control and accountability. In C. S. Chapman, A. G. Hopwood, & M. D. Shields (Eds.), Handbook of management accounting research (pp. 785–802). Elsevier.

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O'Dwyer, B., Unerman, J., & Hession, E. (2005). User needs in sustainability reporting: Perspectives of stakeholders in Ireland. European Accounting Review, 14(4), 759–787. Patten, D. M. (2002). The relation between environmental performance and environmental disclosure: A research note. Accounting, Organizations and Society, 27(8), 763–773. Pérez-López, D., Moreno-Romero, A., & Barkemeyer, R. (2015). Exploring the relationship between sustainability reporting and sustainability management practices. Business Strategy and the Environment, 24(8), 720–734. Magnus Frostenson is a professor of Organization and Leadership at the Østfold University College, Norway. He also holds a position at Örebro University School of Business, Sweden. His research interests cover many topics within business administration, including business ethics, CSR, sustainability reporting and the management of professions.  

Chapter 10

Addressing Challenges to Labour Rights Reporting on Global Value Chains: Social Governance Mechanisms as a Way Forward Sepideh Parsa

and Andrea Werner

Abstract  With the spread of globalisation, transnational companies (TNCs) face increasing challenges to uphold labour rights along their value chains, raising concerns over their ability to truly discharge their accountability to their wider workforce and thus contribute to Sustainable Development Goals. We provide two examples of workforce issues, migrant workers and wages, to illustrate the complexities and challenges that accountability for labour rights brings. We argue that existing governance mechanisms are not designed to capture the pressing workforce issues that TNCs are expected to deal with, and there is a need for further mechanisms to support and guide TNCs’ efforts. We focus on three types of governance private, public and social - and propose how changes can be made to help improve corporate accountability for labour rights.

10.1 Challenges to Corporate Accountability With neo-liberal logics mainstreaming how morality is inscribed in the global market, transnational companies (TNCs) face increasing challenges to uphold labour rights, undermining the notion of social justice, that is, the fair distribution of benefits and opportunities, by favouring investors (Michelon et al., 2020) at the expense of workers (Sikka, 2015). A vast array of complexities and challenges undermine the protection of workers’ rights throughout Global Value Chains (GVCs). More attention needs to be paid to labour rights in global systems so that companies can set up systems and procedures by which they can take more meaningful steps towards discharging their accountability to their wider workforce, and thus S. Parsa (*) · A. Werner Middlesex University, London, UK e-mail: [email protected]; [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Kacanski et al. (eds.), Measuring Sustainability and CSR: From Reporting to Decision-Making, Ethical Economy 64, https://doi.org/10.1007/978-3-031-26959-2_10

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contribute to the United Nation’s Sustainable Development Goals (SDGs). The term ‘wider workforce’ encompasses all groups of workers employed in the entire GVC of a TNC, however, TNCs often find it challenging to report on workforce issues outside their national borders and beyond their first tier suppliers (Parsa et al., 2018). The question of ‘how’ corporate accountability can be potentially discharged to the wider workforce in a way that it promotes social justice and sustainable development is the focus of debate in this chapter. Within a neo-liberal global system, current labour rights reporting has limited potential to unravel the reality of labour rights challenges in practice (Chiapello, 2017) as reporting tends to be restricted to those labour issues that will not carry any reputational risks and hence, has hardly any adverse impact on share prices (Pucker, 2021). Thus, unless labour rights are viewed from the perspective of workers, any efforts that TNCs make to discharge their accountability to their workforce is likely to be for the benefit of financial stakeholders only. Central to viewing labour rights from workers’ perspectives lies dialogic engagement (Bebbington et al., 2007) with workforce representatives, ensuring active enquiry and engagement with them on continuous basis over a long period of time. In the absence of such ‘intelligent accountability’ (Roberts, 2009), managers will avoid obtaining and, hence, reporting information on controversial and sensitive workforce related aspects at the bottom end of their GVCs, a mode of behaviour termed ‘functional stupidity’ (Roberts, 2018). In the following section, we discuss some examples of the complex challenges that managers would face if they were to engage in-depth with GVC workforce issues. This will be followed by an overview of how different layers of governance mechanisms - private, public and social - interacting with one another can play a key role in helping companies discharge their accountability to their wider workforce and uphold labour rights along their GVCs, with a conclusion summarising the need for a much needed shift in how labour rights are reported to help create more socially just GVCs.

10.2 Complexities of Global Value Chains There are many labour rights related-issues along GVCs, some with their own complexities and challenges, which need to be systematically considered and addressed if TNCs are going to discharge their accountability to their wider workforce in a meaningful way. We will discuss the issues of migrant workers and wages as examples illustrating the complexities of workforce issues.

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10.2.1 Migrant Workers With the rapid spread of globalisation and the unequal distribution of wealth, there is an increase in migrant workers’ movements (Taran, 2001). Migrant workers, forming about 3.3% of the global population,1 contribute significantly to the economies of their host countries. In many instances, they enter their destination countries/regions with limited information about the jobs, working and living conditions in those destinations and, often, end up in poor working and living conditions. Migrant workers often have limited bargaining power and insecure contractual arrangements and/or have their visa status tied to a specific employer or do not hold a valid work permit (ILO, 2016, para. 531). In most countries, migrant workers are denied the same rights as national workers; examples include Indian low skilled construction workers in Dubai and Qatar or Mexicans toiling in Californian tomato fields.2 The lack of transparency coupled with the absence of formal and reliable channels of communication lead many migrant workers to be at risk of exploitation and human trafficking, and of falling victim to modern slavery. Of these, female migrant workers, who form about 42% of the migrant workers, are at an even higher risk of exploitation, as they are exposed to harassment and sexual violence, especially when crossing borders where they have limited or no information about the dangers that may be involved en-route. In addition, female migrant workers usually get paid less (i.e., gender-pay gap), especially in low income countries (Rakotonarivo, 2020). The above are only examples of some of the complexities related to migrant workers and can show why migrants remain a major challenge to social and economic policy makers in any country. ILO standards on migration (Instrument 16) covers countries of origin of workers as well as their destination countries so that the migration flows can be managed with adequate protection against exploitation and human trafficking.3 According to the ILO s’ decent work agenda, all workers are entitled to fundamental human rights at work, including the right to be protected against, for example, discrimination; protection against accidents, injuries and diseases at work; and social security, social inclusion and participation in social dialogue.4 There are 18 International Conventions on migrant workers and their family members. The implementation of these conventions is monitored by the Committee on the Protection of the Rights of All Migrant Workers and Members of their Families (CMW) that operates under the Office of the High Commissioner for Human Rights (UN Human Rights). The committee holds dialogues with social organisations and government representatives to provide support and guidance in

 https://www.ilo.org/global/standards/subjects-covered-by-international-labour-standards/ migrant-workers/lang%2D%2Den/index.htm 2  https://www.ethicaltrade.org/issues/migrant-workers 3  https://www.ilo.org/dyn/normlex/en/f?p=NORMLEXPUB:12030:0::NO::: 4  https://www.ilo.org/beijing/areas-of-work/labour-migration/lang%2D%2Den/index.htm 1

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different countries.5 In addition, migrant workers’ issues are supported by the UN 2030 SDG86 (Decent Work and Economic Growth), SDG107 (Reduce inequality within and among countries) and some aspects of SDG168 (Peace, justice and strong institutions).

10.2.2 Wages An issue of controversy and contestation has been the pay of workers in GVCs, in particular in captive value chains,9 producing garments, electronics and toys, among others (Schrage & Gilbert, 2021). The wages paid to workers are perceived to be way too low to enable them to have a decent standard of living; they are forced to work long hours and still struggle to survive. Such practices go against Article 23(3) of the Universal Declaration of Human Rights, which states that: “… everyone who works has the right to just and favourable remuneration ensuring … an existence worthy of human dignity” and Article 25, which outlines that: “… everyone has the right to a standard of living adequate for [their] health and well-being …, including food, clothing, housing and medical care”. The issue of too low wages arises because TNCs are not only thought to take advantage of lower labour costs in developing economies, they are also thought to actively exacerbate the issue through their contracts and pricing policies forcing suppliers to produce goods at ever lower costs and shorter turn-around times (Ford & Gillan, 2017; Schrage & Gilbert, 2021). Not all developing economies have legally mandated minimum wages to counteract exploitative pay. But even where minimum wage laws exist, they still are ineffective in addressing the issue as: (a) they are often not enforced and (b) generally set too low by governments in order not to jeopardise the competitiveness of their economy. It has been estimated that, for example, in the garment industry workers ought to earn between 100% and 300% more than the legally mandated minimum wage, to ensure a decent livelihood (Egels-Zandén, 2017; Ford & Gillan, 2017). This gulf between legal minimum wages, if they are paid at all, and the wages needed for workers to live – with wages being even more important in such

 https://www.ohchr.org/en/hrbodies/cmw/pages/cmwindex.aspx  SD8 promotes sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all. Retrieved from https://sdgs.un.org/goals/goal8 7  SDG10 calls for reducing inequalities in income as well as those based on age, sex, disability, race, ethnicity, origin, religion or economic or other status within a country. It addresses inequalities among countries, including those related to representation, migration and development assistance. Retrieved from https://www.unoosa.org/oosa/en/ourwork/space4sdgs/sdg10.html 8  SDG16 promotes just, peaceful and inclusive societies. Conflict, insecurity, weak institutions and limited access to justice remain a great threat to sustainable development. Retrieved from https:// www.un.org/sustainabledevelopment/peace-justice/ 9  That is, GVCs where a small number of large buyers exert a high degree of control over smaller suppliers. 5 6

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contexts where a social welfare net provided by the state is next to absent - has led to campaigns around the idea of a ‘living wage’, a wage rate that would take into account the actual costs of living (Werner & Lim, 2016). As such, a living wage would go some way to help eradicate poverty (SDG1), promote inclusive economic growth (SDG8) and reduce inequalities (SDG10). The ‘living wage’ concept, however, is fraught with difficulty, due to the relative nature of living standards and costs around the world, and issues such as whether a living wage ought to cover the needs of one person or several and - if the latter - how many family members should be included (ibid.). Nevertheless, the ‘living wage’ concept has gained traction, as in a number of countries, including the UK and New Zealand, civil society organisations publish hourly living wage rates which employers can and do voluntarily adopt (Werner & Lim, 2016), and we also increasingly witness references to ‘living wages’ in TNCs’ suppliers code of conduct (Ashwin et al., 2020). However, more often than not, the intention to implement living wages in supply chains remains an aspiration on paper, even in the few instances where TNCs are keen to address the problem and engage with relevant NGOs and trade unions. The reasons for this include controversies as to how ‘living wages’ should be implemented: based on a ‘cost of living’ formula (Ford & Gillan, 2017) or as an outcome of ‘collective bargaining’ (Ashwin et al., 2020). The former might face challenges as to whether the living wage is set too high or too low. The latter is favoured by trade unions, not least to give workers an active voice in the process, but at the same time, unions are often viewed sceptically by companies and national governments, and there might be government restrictions around union formation, impeding the fight for living wages (ibid). An additional difficulty is posed where a TNC committed to paying ‘living wages’ shares supplier factories with companies that are not committed to this in their GVCs (ibid). If of the several TNCs that source from the same supplier only one has a living wage policy, all workers might only receive a fractional ‘living wage’ supplement, and this may be too low to make a difference. Alternatively, if only a few workers in the factory receive a full living wage, this will be seen as unfair towards those workers who do not. As a result, TNCs argue that this is a collective action problem and only industry-wide agreements or government action on minimum wages can properly address the issue, and until this is in place, TNCs might be reduced to working with their suppliers on minimum wage compliance (ibid). In short, the journey to workers in GVCs receiving a living wage has barely begun.10

 An interesting case study is H&M’s Fair Living Wage Initiative. It has been hailed as showing leadership in the industry on the issue of pay, but it still falls short of delivering living wages to supply chain workers (Banerji et al., 2018). 10

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10.3 Governance of GVCs: Strengthening Accountability for Labour Rights The way GVCs are governed can have a profound influence on the extent to which companies can be held accountable for their endeavours (or lack of it) to uphold labour standards, and this can be pivotal in how benefits and opportunities are distributed to the workforce across GVCs (Parsa, 2019). In GVCs, the way different governance mechanisms interact with one another can shape practices that uphold labour rights and reporting on them. Two types of governance mechanisms - private and public - are presented and discussed in the literature while limited attention has been paid to the need for social governance mechanism. In this section we consider all three.

10.3.1 Private Governance Mechanisms Private governance mechanisms are voluntary forms of self-regulation, including corporate codes of ethics, CSR policies, as well as reporting guidelines/standards such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB). In the absence of any mandatory assurance of sustainability reports, companies usually focus on reporting those aspects that serve their best interest. For example, when reporting on labour rights on GVCs, TNCs usually claim labour rights are respected in accordance with the national requirements and customs of the country in which their supply chains end, without providing much detail on their endeavours to uphold labour rights in their GVCs, despite the GRI G4 reporting guidelines explicitly outlining the need for detailed reporting on their systems and procedures for the protection of labour rights along GVCs (Parsa et al., 2018). This happens as TNCs tend to avoid meddling with what can be considered as either internal affairs of another country or carrying lots of cultural weight and political significance (ibid.). While TNCs’ reporting is expected to promote social justice, that is, a fairer distribution of benefits and opportunities, in reality it is difficult for them to do so as they are expected to devise their own private governance mechanisms to uphold labour standards in areas that fall outside their national jurisdictions, and without any specific international law that sets out rules for practices (and hence reporting) in such circumstances. Most private standards (commonly regarded as soft laws) have a tendency to view labour rights through a narrow perspective. Across the GVCs, (transnational) private governance mechanisms emerge to cover the gap between transnational economic activities and traditional regulatory requirements, often in developing countries (Bair, 2017). However, these private governance mechanisms tend to favour the property rights of owners over labour rights and are ineffective on their own (Islam et al., 2021). For these mechanisms to work, they would need to be supported by (formal or informal) local and international laws and regulations, especially in

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developing countries, which are often inflicted with endemic corruption, and weak local political and legal frameworks (Uddin et al., 2018). For example, while UN committees such as the CMW, engage in dialogue with migrant workers’ representatives, no international guidelines support how migrant workers can access labour representations (Taran, 2001) or how special formal arrangements should be made for female migrant workers (Barrientos et  al., 2019) despite the support that has been internationally expressed for female workers in GVCs (see UNGP, 2011).

10.3.2 Public Governance Public governance mechanisms often cover a range of national government laws and policies as well as international standards/treaties devised through inter-­ governmental agreements and/or via international organisations such as the United Nations (UN), World Trade Organization (WTO), Organization for Economic Cooperation and Development (OECD) and International Labour Organization (ILO). At national levels, they are devised by governments to uphold labour standards within their national jurisdictions (e.g., the British Modern Slavery Act 2015 [MSA]) as well as in the GVCs of companies headquartered in their country (e.g., the German Supply Chain Due Diligence Act [SCDDA]). For example, the MSA requires the annual publication of a Modern Slavery Statement by large companies to demonstrate that they have taken steps to identify, prevent and remedy slavery and human trafficking in all parts of their operations. The MSA has enhanced awareness and many companies have taken favourable steps to improve reporting on issues related to labour rights. But as there are no liabilities attached to non-­ compliance, the MSA has been accused of being more akin to soft law and, effectively, a private governance tool (LeBaron & Rühmkorf, 2017) that, apart from ‘box-ticking’, has not promoted detailed reporting that would lead to meaningful actions being taken against slavery (The Home Office, 2019; Rogerson et al., 2020). More recently, there have been suggestions to improve labour rights by bringing together the three main UK enforcement bodies11 into a single mechanism to utilise and harness various resources (Metcalf, 2019), however, the UK Government is yet to bring forward their post-Brexit Employment Bill that would be the likely vehicle to introduce this. By contrast, Germany will take a more hard law approach with their recently enacted SCDDA, which will come into force in 2023. Large German companies are required to take a systematic approach to identify, prevent and remedy human rights violations along their supply chain, and report on them annually. Unlike the MSA, however, compliance with the SCDDA is monitored by a

 The three bodies are: HM Revenue and Custom National Minimum Wage, HMRC NMW; the Gangmasters and Labour Abuse Authority, GLAA; and the Employment Agency Standards Inspectorate, EASI. 11

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government agency and non-compliance can result in litigation (BMAS, 2021).12 Whilst this is moving companies away from mere voluntary CSR reporting, the SCDDA has been criticised for its focus on large companies only, and not requiring any systematic attention to the second tier suppliers and beyond (Initiative Lieferkettengesetz, 2021). Furthermore, workers’ wages are only to be considered in relation to local minimum wage laws, not ‘living wages’, and there is no overt recognition of migrant workers’ precarious status.13 In GVCs, public governance mechanisms interact with private governance mechanisms; most often having a favourable influence (Pasquali et al., 2021) and may thus help overcome the latter’s tendency for ‘managerial capture’ (Islam et al., 2021). Support of national governments, including of officials and local politicians, is thus considered crucial for an efficiently functioning reporting framework (Antonini et al., 2020; Christ et al., 2019), but is still often lacking, especially in developing countries. While private governance approaches grant TNCs with the flexibility to remain responsive to labour rights issues as they arise, public governance mechanisms help TNCs to secure their legitimacy. However, public and private governance approaches alone are still considered ineffective without local level engagement with multi-stakeholder groups (Schrage & Gilbert, 2021) to reflect local culture and customs (Islam & Van Staden, 2018) as well as the changing nature of stakeholders’ demands and expectations (Jackson et al., 2020). In other words, systematic interaction with social governance mechanisms represented by local civil society, for example, NGOs and trade union representatives (Schrage & Gilbert, 2021), is essential.

10.3.3 Social Governance Social governance mechanisms can be provided by non-state stakeholder groups, national and international civil society organisations such as national and international NGOs and trade unions and human rights watchdogs. It is essential that civil society organisations have the freedom and independence to raise labour related issues as they arise so that they can exert pressures on TNCs as well as on governments. Meaningful changes tend to take place when the integration of private and social governance approaches are supported formally via public governance mechanisms (binding agreements) at national and international levels (Barrientos et al., 2019). The dynamics of relationships between actors from the three layers of governance (e.g., TNCs, NGOs, governments), and how they interact with each other, shape practices within GVCs and can therefore help pave the way for a more thorough and systematic approach to holding TNCs’ accountable for labour rights. A

 Fines of up to €8,000,000, or up to 2% of their average annual global turnover as well as exclusion from winning public contracts in Germany for up to three years (BMAS, 2021). 13  The same criticisms holds true for the MSA. 12

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systematic approach is adopted in the Better Work Programme (BWP) (Bair, 2017), for example, whereby pre-agreements to hold social dialogue and communication between different actors help with perception of issues (e.g., migrant workers, Posthuma & Rossi, 2017; living wage, Schrage & Gilbert, 2021) so that labour standards can be upheld in each country, taking into account each country’s own national and political context (Pasquali et al., 2021). Given the transnational nature of GVCs and their exposure to different national and political contexts (Pasquali et  al., 2021), the only way that labour standards can be upheld systematically is through civil society monitoring. While agreements such as the BWP have been successful by engendering transparency and engaging in dialogue, the key to their success lies in the willingness and engagement of both national as well as international public governance mechanisms (such as ILO instruments) to interact with private governance mechanisms (e.g. TNCs’ reporting frameworks) while maintaining dialogue with civil society. The pressing issue here is whether or not national governments allow local civil society organisations to work freely and independently and follow relevant international guidelines (for NGOs, fidh, 200714; or for trade union representatives, ILO, 199815). To achieve this, more international initiatives are needed to strengthen (national and international) public governance approaches (Mayer et al., 2017) to fully address a range of labour rights issues in different countries but, more importantly, to empower civil society as a key representative of social governance mechanisms rather than just as individual stakeholders. While there are calls to divert the focus away from merely private governance mechanisms to public mechanisms in the power dynamics along GVCs (Mayer et al., 2017), the formal recognition of social governance mechanisms at national and transnational levels can be a step in the right direction. A relevant example relates to the Accord, a legally binding agreement between global brands and retailers and global and national unions, which has focused on Fire and Building Safety in Bangladesh garment factories and has been successful in resolving workers’ complaints and in requiring supplier factories to implement safety remediation actions (Anner, 2020; James et al., 2019). Similar such agreements are needed to address the full range of labour rights issues across all countries that are part of GVCs. But, as pointed out by Siddiqui et al. (2020), the genuine support of national governments is essential if such agreements are going to succeed in enhancing accountability in supply chains, and also to extend the coverage of such agreements.16

 Https://www.fidh.org/en/issues/migrants-rights/Guide-for-NGOs-on-the  The ILO Declaration on Fundamental Principles and Rights at Work (1998). Retrieved from https://www.ilo.org/empent/areas/business-helpdesk/WCMS_DOC_ENT_HLP_FOA_EN/ lang%2D%2Den/index.htm 16  The Accord, for example, is not supported by all global brands sourcing from Bangladesh. 14 15

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10.4 Conclusion In this chapter, we set out to address the question of ‘how’ corporate accountability can be potentially discharged to the wider workforce in a way that it promotes social justice and helps contribute to key sustainable development goals. Starting with the limitations of current labour rights reporting on GVCs, which arise from global market structures, we discussed some of the pressing issues related to migrant workers and wages in order to provide examples of the complexities and challenges of workforce issues in GVCs, which TNCs would need to engage with if they were to truly and fully discharge their accountability in relation to workers in their GVCs. We showed that existing governance mechanisms are not well equipped to deal with such complexities and challenges. Therefore, we argued, there is a need for globally recognised social governance mechanisms provided by local civil society actors. Working hand in hand with, and supported by, national public governance mechanisms, these would enable a more systematic (and internationally agreed) approach to deal with existing as well as emerging labour rights issues. These mechanisms would facilitate and support the discharge of corporate accountability by engendering social dialogue and transparency along GVCs. Unless the need for such changes are formally acknowledged, there is always potential for ‘functional stupidity’ and this will un/intentionally undermine labour rights. This, however, is an unsustainable situation as only a fairer distribution of benefits and opportunities along GVCs providing better life chances for workers will, in the end, ensure peace and security in our global community.

References Anner, M. (2020). Squeezing workers’ rights in global supply chains: Purchasing practices in the Bangladesh garment export sector in comparative perspective. Review of International Political Economy, 27(2), 320–347. Antonini, C., Beck, C., & Larrinaga, C. (2020). Sub-politics and sustainability reporting boundaries. The case of working conditions in global supply chains. Accounting, Auditing & Accountability Journal, 33(3), 1535–1567. Ashwin, S., Oka, C., Schuessler, E., Alexander, R., & Lohmeyer, N. (2020). Spillover effects across transnational industrial relations agreements: The potential and limits of collective action in global supply chains. ILR Review, 73(4), 995–1020. Bair, J. (2017). Contextualising compliance: Hybrid governance in global value chains. New Political Economy, 22(2), 169–185. Banerji, S., Earley, K., & McAllister, P. (2018). Review of H&M group’s roadmap to fair living wage. Ethical Trade Initiative. Retrieved from https://www.ethicaltrade.org/resources/ review-­hm-­groups-­roadmap-­to-­fair-­living-­wage Barrientos, S., Bianchi, L., & Berman, C. (2019). Gender and governance of global value chains: Promoting the rights of women workers. International Labour Review, 158(4), 729–752. Bebbington, J., Brown, J., Frame, B., & Thomson, I. (2007). Theorizing engagement: The potential of a critical dialogic approach. Accounting, Auditing & Accountability Journal, 20(3), 356–381.

10  Addressing Challenges to Labour Rights Reporting on Global Value Chains: Social… 105 BMAS. (2021). Gesetz über die unternehmerischen Sorgfaltspflichten in Lieferketten. Retrieved from https://www.csr-­in-­deutschland.de/DE/Wirtschaft-­Menschenrechte/Gesetz-­ueber-­die-­ unternehmerischen-­Sorgfaltspflichten-­in-­Lieferketten/gesetz-­ueber-­die-­unternehmerischen-­ sorgfaltspflichten-­in-­lieferketten.html Chiapello, E. (2017). Critical accounting research and neoliberalism. Critical Perspectives on Accounting, 43, 47–64. Christ, K., Rao, K., & Burritt, R. (2019). Accounting for modern slavery: An analysis of Australian listed company disclosures. Accounting, Auditing & Accountability Journal, 32(3), 836–865. Egels-Zandén, N. (2017). The role of SMEs in global production networks: A Swedish SME’s payment of living wages at its Indian supplier. Business & Society, 56(1), 92–129. Ford, M., & Gillan, M. (2017). In search of a living wage in Southeast Asia. Employee Relations, 39(6), 903–914. Initiative Lieferkettengesetz. (2021). Was das neue Lieferkettengesetz liefert  – und was nicht. Retrieved from https://lieferkettengesetz.de/wp-­content/uploads/2021/06/Initiative-­ Lieferkettengesetz_Analyse_Was-­das-­neue-­Gesetz-­liefert.pdf International Labor Organization (1998). ILO declarationon fundamental principles and rights at work and its follow-up, International Labor Organization Publications. International Labour Organization (ILO). (2016). Promoting fair migration. Report III (Part 1B), International labour conference, 105th session. Islam, M. A., & van Staden, C. J. (2018). Social movement NGOs and the comprehensiveness of conflict mineral disclosures: Evidence from global companies. Accounting, Organizations and Society, 65, 1–19. Islam, M. A., Deegan, C., & Haque, S. (2021). Corporate human rights performance and moral power: A study of retail MNCs’ supply chains in Bangladesh. Critical Perspectives on Accounting, 74, 102–163. Jackson, G., Bartosch, J., Avetisyan, E., Kinderman, D., & Knudsen, J.  S. (2020). Mandatory non-financial disclosure and its influence on CSR: An international comparison. Journal of Business Ethics, 162(2), 323–342. James, P., Miles, L., Croucher, R., & Houssart, M. (2019). Regulating factory safety in the Bangladeshi garment industry. Regulation & Governance, 13(3), 431–444. LeBaron, G., & Rühmkorf, A. (2017). Steering CSR through home state regulation: A comparison of the impact of the UK bribery act and modern slavery act on global supply chain governance. Global Policy, 8, 15–28. Mayer, F. W., Phillips, N., & Posthuma, A. C. (2017). The political economy of governance in a ‘global value chain world’. New Political Economy, 22(2), 129–133. Metcalf, D. (2019). United Kingdom Labour Market Enforcement Strategy 2019/20: Presented to Parliament pursuant to Section 5 (1) of the Immigration Act 2016, Director of Labour Market Enforcement. Retrieved from: https://assets.publishing.service.gov.uk/government/ uploads/system/uploads/attachment_data/file/819014/UK_Labour_Market_Enforcement_ Strategy_2019_to_2020-­full_report.pdf Michelon, G., Rodrigue, M., & Trevisan, E. (2020). The marketization of a social movement: Activists, shareholders and CSR disclosure. Accounting, Organizations and Society, 80, 101074. Parsa, S. (2019). Corporate governance and human resource management. In R. Prouska, I. Roper, & U.  C. N.  Ayudhya (Eds.), Critical issues in human resource management, contemporary perspectives. Macmillan International Higher Education, Red Globe Press. Parsa, S., Roper, I., Muller-Camen, M., & Szigetvari, E. (2018). Have labour practices and human rights disclosures enhanced corporate accountability? The case of the GRI framework. Accounting Forum, 42(1), 47–64. Pasquali, G., Godfrey, S., & Nadvi, K. (2021). Understanding regional value chains through the interaction of public and private governance: Insights from southern Africa’s apparel sector. Journal of International Business Policy, 4(3), 368–389.

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Posthuma, A., & Rossi, A. (2017). Coordinated governance in global value chains: Supranational dynamics and the role of the International Labour Organization. New Political Economy, 22(2), 186–202. Pucker, K.P. (2021). Overselling sustainability reporting. Harvard Business Review, May–June. Rakotonarivo, A. (2020). Who are the women on the move? A portrait of female migrant workers, ILOSTAT. Retrieved from https://ilostat.ilo.org/ who-­are-­the-­women-­on-­the-­move-­a-­portrait-­of-­female-­migrant-­workers/ Roberts, J. (2009). No one is perfect: The limits of transparency and an ethic for ‘intelligent’ accountability. Accounting, Organizations and Society, 34(8), 957–970. Roberts, J. (2018). Managing only with transparency: The strategic functions of ignorance. Critical Perspectives on Accounting, 55, 53–60. Rogerson, M., Crane, A., Soundararajan, V., Grosvold, J., & Cho, C. H. (2020). Organisational responses to mandatory modern slavery disclosure legislation: A failure of experimentalist governance. Accounting, Auditing & Accountability Journal, 33(7), 1505–1534. Schrage, S., & Gilbert, D.  U. (2021). Addressing governance gaps in global value chains: Introducing a systematic typology. Journal of Business Ethics, 170(4), 657–672. Siddiqui, J., McPhail, K., & Rahman, S. S. (2020). Private governance responsibilisation in global supply chains: The case of Rana plaza. Accounting, Auditing & Accountability Journal, 33(7), 1569–1594. Sikka, P. (2015). The hand of accounting and accountancy firms in deepening income and wealth inequalities and the economic crisis: Some evidence. Critical Perspectives on Accounting, 30, 46–62. Taran, P.  A. (2001). Human rights of migrants: Challenges of the new decade. International Migration, 38(6), 7–51. The Home Office. (2019). Independent review of the Modern Slavery Act: final report. Retrieved from https://www.gov.uk/government/publications/independent-­review-­of-­the-­modern-­ slavery-­act-­final-­report Uddin, S., Siddiqui, J., & Islam, M. A. (2018). Corporate social responsibility disclosures, traditionalism and politics: A story from a traditional setting. Journal of Business Ethics, 151(2), 409–428. United Nations Human Rights Council UNGP (2011). Guiding principles on business and humanrights: implementing the United Nations protect, respect and remedy framework, A/ HRC/17/31. Retrieved from: www.ohchr.org/documents/issues/business/A.HRC.17.31.pdf Werner, A., & Lim, M. (2016). The ethics of the living wage: A review and research agenda. Journal of Business Ethics, 137(3), 433–447. Dr. Sepideh Parsa is Associate Professor of Accounting in the Accounting and Finance Department at Middlesex University Business School. Sepideh’s current research focuses on labour rights reporting. She acts as a reviewer for accounting journals and the Leverhulme Trust, as well as for British Academy grant applications.  

Dr. Andrea Werner is Associate Professor of Business Ethics in the Management, Leadership and Organisations Department at Middlesex University Business School. Andrea’s research focuses on business ethics, including living wages, influence of civil society on business practice, and ethics in small and medium-sized enterprises. Previously, she worked as a Researcher for the Institute of Business Ethics in London.  

Chapter 11

CSR Ratings in the Presence of a Former Rating Agency Analyst: Evidence from LinkedIn Dongyoung Lee

Abstract  This chapter examines whether the level of CSR ratings is relatively higher for firms hiring a former CSR analyst from KLD (Kinder, Lydenberg, and Domini Research & Analytics). Using hand-collected data from LinkedIn profiles, I show that the presence of former KLD rating agency analysts is positively related to KLD’s CSR ratings for their current employers while it is not associated with CSR ratings from a different data provider (Thomson Reuters’s ASSET4). These findings indicate that tacit knowledge about the internal generation of CSR ratings varies across different raters. The positive relationship between the existence of a former KLD analyst and KLD’s CSR ratings extends to a difference-in-differences analysis, which shows improvement in CSR ratings in the year after the recruitment of a former rating agency analyst. Thus, interfirm mobility results in knowledge spillovers from the CSR rating agency to the rated firm that poaches talent from the rating agency.

11.1 Introduction This chapter examines whether corporate social responsibility (CSR) ratings are relatively higher for firms with the presence of a former CSR analyst from a rating agency. This research question is important for three reasons. First, like financial analysts, CSR analysts play an information intermediary role for capital market participants who are interested in impact investing. While CSR analysts guide trillions of dollars of investment in financial markets (Chatterji et al., 2016), little is known about CSR analysts’ informational role in corporate outcomes, likely because of data unavailability on individual CSR analysts.

D. Lee (*) Desautels Faculty of Management, McGill University, Montreal, QC, Canada e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Kacanski et al. (eds.), Measuring Sustainability and CSR: From Reporting to Decision-Making, Ethical Economy 64, https://doi.org/10.1007/978-3-031-26959-2_11

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Second, prior research documents potential benefits associated with increased CSR ratings (e.g., Cho et al., 2013; Ge & Liu, 2015), but understanding of exactly how firms enhance CSR ratings is limited. This chapter focuses on a specific mechanism known as “learning-by-hiring” and investigates the level of CSR ratings when firms recruit an analyst from a rating agency.1 If firms aim to increase CSR ratings, they have a strategic incentive to hire a former rating analyst to acquire tacit knowledge about the internal generation of CSR scores within the rating agency. This knowledge is particularly important because rating methodologies are often proprietary in nature (KLD, 2010), and the underlying criteria for CSR scores are subject to interpretation by different rating agencies (Chatterji et al., 2016). Third, firm managers spend significant resources to boost their CSR ratings (Chatterji et al., 2016). For example, Fortune Global 500 firms spent approximately $20 billion per year on CSR over the 2011–2013 period, and 95 percent of Fortune Global 250 firms issued stand-alone CSR reports in 2011 to demonstrate their corporate social actions and, thus, to garner favorable CSR ratings.2 Given a high level of spending on CSR activities, top management has a vested interest in understanding whether the learning-by-hiring approach is helpful in improving the level of CSR ratings. I primarily focus on CSR ratings provided by KLD (Kinder, Lydenberg, and Domini Research & Analytics) because it is most widely used in academic research (Chatterji et al., 2016). Waddock (2003, p. 369) refers to KLD data as “the de facto research standard” in the CSR literature. Most prior studies view CSR ratings as a rather “exogenous” evaluation of corporate social engagement from the independent rating agency. This study takes a fresh perspective that labor mobility might be an endogenous link that helps transfer CSR rating–related knowledge from the rating agency to the rated firms. I also use CSR ratings known as ASSET4 from Thomson Reuters to confirm that the knowledge spillover is confined to specific CSR ratings associated with interfirm labor mobility. This study makes several contributions. First, using hand-collected LinkedIn data, I provide initial empirical evidence that firms specifically recruit former rating agency analysts to strengthen relationships with nonfinancial stakeholders and, thus, to induce higher CSR ratings.3 This has a managerial implication that  Parrotta and Pozzoli (2012) define “learning-by-hiring” as the process of knowledge transmission through interfirm labor mobility. 2  The figures come from EPG consulting firm (https://www.varkeyfoundation.org/media/3042/bbe-­ epg-­report%C6%92.pdf) and KPMG International (https://assets.kpmg.com/content/dam/kpmg/ xx/pdf/2017/10/kpmg-survey-of-corporate-responsibility-reporting-2017.pdf), respectively. 3  For example, in 2004, Exxon Mobil Corporation appointed KLD’s former environmental analyst as a citizenship/sustainability adviser whose job was to help enhance the firm’s CSR engagement. Specifically, according to job descriptions in the LinkedIn profile, the main responsibilities of the citizenship/sustainability adviser include (11.1) creating the firm’s first CSR issue platform; (2) producing the corporate citizenship report; (3) managing a cross-functional company network to identify risks and opportunities on key environmental, social, and human rights issues; and (4) developing the firm’s biannual Opinion Leaders Dialogue among senior managers, leaders from non-governmental organizations, and impact investing communities. 1

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hiring a former rating agency employee can be a strategic move to improve the firm’s CSR rating. Second, I find no evidence of an association between the presence of a former KLD analyst and ASSET4 CSR ratings. This implies that the informational role of former CSR analysts in public firms stems from their own past work experience with the formulation of specific CSR ratings. Finally, this study contributes to the nascent work incorporating experts on stakeholder relations. Grimpe, Kaiser, and Sofka (2019, p. 706) note that “[s]takeholder considerations are largely absent from strategic human capital theory” and call for further research on the integration of CSR in the knowledge spillover literature. I examine the effect of knowledge workers on CSR ratings and provide novel evidence that the learning-by-hiring phenomenon extends to former analysts at the CSR rating agency.

11.2 Prior Literature and Hypothesis While many prior studies use CSR ratings from KLD (e.g., Cho et al., 2013; De Villiers & Van Staden, 2011; Ge & Liu, 2015), they have paid little attention to individual KLD analysts who evaluate firms’ CSR engagement. Having a deep understanding of rating analysts’ career information is critically important because their CSR ratings tend to be the fundamental basis of investment decisions for pro-­ social investors and fund managers for socially responsible investing (Chatterji & Toffel, 2010). The lack of prior studies on CSR rating analysts is due to data unavailability on analyst background information from the rating agency as well as from traditional management data providers (e.g., ExecuComp). I overcome this data challenge by collecting career information on employees with past KLD work experience from LinkedIn, the world’s largest professional networking website. Strategic human capital theory posits that the firm has economic incentives to hire away key employees from other organizations to access external specialized knowledge that cannot be easily created within the firm. In line with this proposition, Levin et al.’s (1987) survey study suggests that hiring R&D employees from innovating firms can be an effective method of organizational learning. The underlying premise of this argument is that both tacit and explicit knowledge acquired from past work experience is retained at an individual employee level, and knowledge workers can take it with them when moving to another company (Drucker, 1998).4 Using patent citations as a proxy for knowledge spillovers in the semiconductor industry, many studies find empirical evidence that interfirm labor mobility results in increased innovation benefits for hiring firms (e.g., Almeida & Kogut, 1999; Rosenkopf & Almeida, 2003; Song et al., 2003). This finding also extends to  According to Drucker (1998, p. ix), “knowledge workers, unlike manual workers in manufacturing, own the means of production: they carry that knowledge in their heads and can therefore take it with them.” 4

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other industries requiring knowledge workers. Møen (2005) examines R&D workers in the Norwegian machinery and equipment industry and finds that they are willing to accept lower wages to acquire valuable knowledge from on-the-job training in anticipation of higher wage growth in the future. In the mutual fund industry, Rao and Drazin (2002) report that recruiting professional managers from rivals can be a strategy to overcome resource constraints, as those managers can bring the organizational skills and knowledge essential for product innovation. Collectively, this line of research on learning-by-hiring suggests that in knowledge-based industries, managerial skills developed from past work experience increase general human capital that can be applicable to other firms. That is, knowledge workers carry knowledge and related skills that can help boost the performance of their new firms. Grimpe et al. (2019) find that past advocacy work experience creates signals for valuable human capital in terms of stakeholder knowledge and legitimacy transfers to innovative firms. In line with this finding, I argue that former KLD analysts’ experience with the formulation of CSR ratings provides them with valuable knowledge and skills on how the rated firm can increase its CSR ratings through improved interactions with multiple stakeholders. To the extent that these analysts can use their CSR rating–specific expertise to exert a positive influence on CSR ratings of their new firms, I hypothesize that the level of CSR ratings is relatively higher for firms in the presence of a former CSR rating agency analyst than for otherwise similar firms. I may not find evidence consistent with the hypothesis due to factors that can prevent potential benefits associated with the learning-by-hiring approach. Groysberg et  al. (2008) examine the portability of star security analysts’ performance and conclude that even in the knowledge-intensive industry, knowledge embodied in individual experts has some firm-specific components that cannot be transferred to the same job function in peer firms. They find that star analysts suffer an immediate decline in performance after switching employers. In addition, Singh and Agrawal (2011) posit that it can take several years for new recruits to contribute to organizational outcomes. Finally, Starr et al. (2018) argue that labor market frictions can restrict mobility both across and within industries. Given potentially limited transferability of knowledge and skills across industries, the firm trying to hire personnel from a different consulting industry might be forced to recruit workers with less initial experience and, if so, provide more firm-specific training to help support the current job performance of these workers over a long horizon. As such, interfirm mobility across industries may not necessarily have an immediate and positive impact on the performance of the destination firm, as the hiring firm must incur additional costs for the necessary on-the-job training for new employees. Overall, these studies collectively indicate that to facilitate learning-by-hiring for the benefits of the recruiting firm, past work experience must increase task-specific human capital that is applicable to multiple firms across industries. Then, the hiring firm can rely on new employees’ tacit knowledge and specialized skills to help improve firm performance soon after recruitment, without much guidance given to these employees.

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11.3 Data and Empirical Analysis 11.3.1 Data I use a LinkedIn corporate recruiter account in September 2018 to identify employees with past work experience at KLD. I carefully read all 111 LinkedIn profiles with a past KLD work history and merged the LinkedIn data with KLD’s CSR ratings and financial information from COMPUSTAT. To ensure that there was enough time for a newly appointed employee to exert a positive influence on the CSR rating of the firm, I required each employee to stay with the rated firm during the entire year subsequent to the year of the initial employment. This process resulted in 12 individuals who moved from KLD to the public firm covered by KLD during the 2003–2013 period.5 The sample starts in 2003, which is the first available year from the LinkedIn data, and ends in 2013, consistent with prior research (e.g., Flammer, 2018), given drastic changes in data coverage for CSR ratings in the post-2013 period (MSCI, 2015).6 Panel A of Table 11.1 presents the frequency distribution of the sample with the presence of a former KLD analyst. I use all available firm-year observations in which the employee is present at the rated firm throughout the entire year, which ensures alignment of the CSR assessment period with that of the presence of a former KLD employee. This process eliminates any cases in which CSR ratings are based on the partial year of employment, which helps reduce measurement errors for the accurate identification of ex-KLD analysts’ presence at the firm. In total, a former KLD analyst appeared in 41 firm-year observations with 12 unique firms for the test of the hypothesis. While the size of the sample is relatively small, it contains full available data from LinkedIn regarding individuals who switched jobs from KLD to a public firm rated by KLD. Panel A shows that the sample with the existence of an ex-KLD analyst is fairly evenly distributed over time.

11.3.2 Test of the Hypothesis and Results I code KLD as 1 when the firm has an employee with KLD work experience and 0 otherwise. Following Flammer (2015), I identify matched control observations using the Mahalanobis distance scores based on five major firm characteristics: firm  Most employees with KLD work history tend to stay in the same advisory and consulting industries. As the initial LinkedIn search resulted in 111 individuals with past KLD work experience, I estimate that approximately 10 percent (12/111) of these analysts moved from KLD to a public firm rated by KLD. 6  KLD was acquired by RiskMetrics Group in November 2009, which was later acquired by MSCI in March of 2010. Thus, since the initial acquisition, I allow for up to four years during which a former KLD employee can find a job at a public firm rated by KLD. Given that MSCI now owns KLD, I exclude MSCI from the sample. 5

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Table 11.1  The main empirical analysis results (A) Frequency table for the sample with the presence of a former KLD analyst (KLD = 1) Year Frequency 2004 2 2005 3 2006 3 2007 4 2008 4 2009 6 2010 5 2011 6 2012 4 2013 4 Total firm-year obs. 41 (12 unique firms) (B) Summary statistics (p-values come from mean difference tests) Obs. Mean 25% Median CSR KLD = 1 41 7.976 6 9 KLD = 0 205 4.634 1 4 Size KLD = 1 41 11.235 9.775 12.09 KLD = 0 205 10.614 9.229 10.88 Cash holdings KLD = 1 41 0.179 0.055 0.150 KLD = 0 205 0.182 0.057 0.138 Leverage KLD = 1 41 0.084 0.029 0.040 KLD = 0 205 0.082 0.023 0.057 Market-to-book KLD = 1 41 0.324 1.378 1.818 KLD = 0 205 1.578 0.901 1.586 ROA KLD = 1 41 0.052 0.010 0.016 KLD = 0 205 0.044 0.005 0.015

75% 11 8 12.402 12.236 0.277 0.299 0.127 0.117 3.777 2.622 0.127 0.093

p-value 0.0000 0.1305 0.8948 0.8692 0.6084 0.5078

(C) OLS regression of CSR KLD Size Cash holdings Leverage Market-to-book ROA Intercept Industry & year FE N Adj. R2

Coefficient 2.342 1.592 5.480 8.113 0.0245 4.717 −7.636 Included 246 0.549

Standard errors 0.823 0.176 3.313 3.588 0.0260 5.140 2.139

(p-value) (0.005) (0.000) (0.101) (0.025) (0.347) (0.361) (0.001)

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size, cash holdings, leverage, market-to-book ratio, and return on assets (ROA).7 Specifically, from the pool of all available COMPUSTAT firms without the presence of a former KLD analyst (KLD = 0), I find the five nearest-neighbor matched observations (with replacement) at the firm-year level during the same year within the same SIC one-digit industry code. Because the number of firm-year observations with ex-KLD analysts is small (i.e., 41), as shown in Panel A of Table 11.1, one-to-­ five matching is a necessary research design choice to ensure reasonable sample sizes for the estimation of the multivariate regression analyses (Harris, 1985).8 Panel B of Table 11.1 shows descriptive statistics for the matched groups with and without a former KLD analyst. The mean difference tests reveal that the two groups are not statistically different from each other in terms of the five firm characteristics, consistent with successful matching. By contrast, the two groups exhibit significant differences in CSR, which I define as the sum of strengths in the five categories of stakeholder relations (i.e., community, environment, product, employees, and diversity) following prior research (Flammer, 2018; Lee, 2020). The mean value of CSR is 7.976 in the group with a former KLD analyst, while that in the matched group is 4.634, indicating that the level of CSR ratings is approximately 72 percent (7.976/4.634) higher for firms hiring former KLD analysts than for otherwise similar firms.9 To formally test the hypothesis, I estimate ordinary least squares (OLS) regression Model (11.1) using the matched firm-year observations.10 All standard errors are clustered at the firm level. CSR i ,t = β 0 + β1KLDi ,t + β 2Sizei ,t + β 3 Cash Holdingsi ,t + β 4 Leveragei ,t + β 5 Market − to − book i ,t + β 6 ROA i ,t + Industry & Year fixed effeccts + ε i ,t .

(11.1)

7  Consistent with Flammer (2015), firm size is the natural log of total assets. Cash holdings are the ratio of cash and equivalents to total assets. Leverage is the ratio of long-term debt to total assets. Market-to-book is the ratio of the market value of equity to its book value. ROA is the ratio of income before extraordinary items to total assets. 8  To conduct a one-to-many matching approach, the industry partition must be broad enough so that the potential pool of control firms for the matching based on firm characteristics is sufficiently large. Therefore, I use the industry partition of one-digit SIC to identify five matched firm-year observations without the presence of an ex-KLD analyst. However, unreported analyses show that the regression results do not change qualitatively if the industry is alternatively defined by two-­ digit SIC codes. 9  Charitable giving is one of the factors for KLD’s CSR ratings. Untabulated analyses show that 70.7 percent of firms with a former KLD analyst have at least one corporate giving/foundation program, and the average amount of philanthropic giving for this group is close to $30 million. By contrast, 42.9 percent of the matched firms without an ex-KLD analyst have a corporate giving/ foundation program, and the mean value of corporate philanthropy for this group is approximately $10.64 million. 10  It is possible that the matched control group contains former KLD analysts without LinkedIn profiles. This possibility will bias against finding a positive association between KLD and CSR in the estimation of Model (11.1).

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The subscripts i and t denote firm and year, respectively. Panel C of Table 11.1 reports the results from estimating Model (11.1). I find that the coefficient of KLD is positive and significant (2.342; p = 0.005), confirming the argument that the level of CSR ratings is relatively higher for firms with a former KLD analyst than otherwise similar firms.11 This finding indicates that the level of CSR ratings is positively related to the presence of a former rating agency analyst.

11.4 The Use of CSR Ratings from a Different Rating Agency I also examine CSR ratings from a different rating agency to help corroborate the argument that the knowledge spillover runs from a specific CSR rating agency to the public firm rated by that rating agency through interfirm labor mobility. Specifically, I re-estimate Model (11.1) after replacing the dependent variable with CSR ratings from Thomson Reuters’s ASSET4—specifically, environmental scores, social scores, and composite scores encompassing all three environmental, social, and governance areas (each is measured by ASSET4 on a 0–100 scale). Table  11.2 shows that each of these CSR scores from ASSET4 is not associated with the presence of a former KLD analyst. By contrast, Table 11.2 continues to report a positive coefficient of KLD (2.043; p = 0.068) when the dependent variable is CSR from KLD, despite a smaller sample size due to the requirement that firm-specific CSR ratings must be available under both data providers (i.e., KLD and ASSET4). These findings are consistent with the idea that CSR rating methodologies vary across different raters, and tacit knowledge about specific CSR rating formulation matters when the hiring firm employs the learning-by-hiring strategy for the benefits of its CSR ratings.

11.5 Difference-in-Differences Analysis I use a difference-in-differences methodology to test whether the CSR rating increases over time after the firm hires a former KLD analyst, compared with otherwise similar firms. For this analysis, I seek to retain only one firm-year observation for each of the 12 firms around the hiring year to measure firm-specific changes in CSR ratings over time. I exclude 2 firms with unavailable data for the construction of change variables. As a result, I have 10 firm-year observations with 10 unique  In untabulated analyses, I conduct sensitivity tests using alternative control groups and continue to find a positive coefficient of KLD when I employ one-to-six matching or one-to-seven matching instead. This finding also holds true when I include all available COMPUSTAT firms without ex-­ KLD analysts as the control group, suggesting that a positive association between KLD and CSR is robust to different sizes of control groups. 11

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Table 11.2  The use of ASSET4’s CSR rating data CSR rating data = KLD Dependent variable = CSR Coefficient (p-value) KLD 2.043 (0.068) Size 1.998 (0.000) Cash holdings 5.184 (0.210) Leverage 6.570 (0.130) Market-to-book 0.0221 (0.374) ROA 3.585 (0.759) Intercept −15.96 (0.000) Industry & year Included FE N 195 Number of 35 KLD = 1 Number of 160 KLD = 0 Adj. R2 0.453

ASSET4 Environmental score Coefficient (p-value) 6.272 (0.491) 16.51 (0.000) 33.28 (0.331) 22.82 (0.508) 0.0535 (0.750) 35.00 (0.722) −104.3 (0.001) Included

ASSET4

ASSET4

Social score Coefficient (p-value) 4.186 (0.584) 10.48 (0.000) 16.99 (0.551) 65.71 (0.035) 0.246 (0.159) 132.1 (0.145) −57.28 (0.019) Included

Composite score Coefficient (p-value) 5.229 (0.515) 13.50 (0.000) 25.13 (0.411) 44.26 (0.139) 0.150 (0.253) 83.56 (0.345) −80.80 (0.002) Included

195 35

195 35

195 35

160

160

160

0.497

0.455

0.513

firms. For the difference-in-differences test, I identify a matched control group in year t − 1 before the hiring year t using the Mahalanobis distance scores for six matching variables (i.e., size, cash holdings, leverage, market-to-book, ROA, and the level of CSR ratings). In addition to the five major firm characteristics, I include CSR ratings in year t – 1 as another matching variable to ensure that the level of CSR ratings is similar between the two groups before the recruitment of a former KLD employee. Using the one-to-five matched sample, I estimate the following logit and OLS regression Model (11.2). CSR ↑i ,t ( or ∆ CSR i ,t ) = β 0 + β1KLDi ,t + β 2 ∆ Sizei ,t + β 3 ∆ Cash Holdingsi ,t + β 4 ∆ Leveragei ,t + β 5 ∆ Market − to − book i ,t + β 6 ∆ ROA i ,t + Industryy & Year fixed effects + ε i ,t ,

(11.2)

where ∆CSRi,t is changes in the CSR rating from year t – 1 to year t + 1, where year t is the hiring year, and CSR↑i,t equals 1 when ∆CSRi,t is positive and 0 otherwise.

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Table 11.3  The difference-in-differences analysis results Regression type =

Logit model regression of CSR↑ Marginal Coefficient effect (p-value) KLD 2.517 0.338 (0.027) ∆size −0.894 −0.120 (0.458) ∆cash holdings −14.83 −1.994 (0.114) ∆leverage −8.392 −1.129 (0.275) ∆market-to-book −0.0279 −0.004 (0.368) ∆ROA −23.85 −3.207 (0.230) Intercept −4.622 (0.032) Industry & year Included FE N 60 Pseudo-R2/Adj. 0.347 R2

OLS model regression of ∆CSR Standard Coefficient errors (p-value) 1.695 0.737 (0.026) −1.587 0.700 (0.028) −1.806 5.576 (0.747) −0.0124 3.841 (0.997) 0.0160 0.0170 (0.352) −13.34 9.353 (0.160) −2.152 1.761 (0.227) Included 60 0.243

As previously defined, KLD is the main explanatory variable that equals 1 for the existence of a former KLD analyst at the firm and 0 otherwise. In line with the measurement period for the dependent variables, I construct changes in firm characteristics from year t – 1 to year t + 1 for the control variables. I expect the coefficient of KLD to be positive insofar as CSR ratings improve over time for firms hiring ex-KLD analysts, compared with otherwise similar firms. Table 11.3 presents the results from estimating regression Model (11.2). When the dependent variable is CSR↑, the estimation of the logit model shows that the coefficient of KLD is significantly positive (2.517; p  =  0.027), and its marginal effect is 0.338, with other variables held at their means, suggesting that the likelihood of an increase in CSR ratings is 33.8 percent higher for firms hiring a former KLD analyst than for otherwise similar firms. For the dependent variable of ∆CSR, the coefficient of KLD is also positive and significant (1.695; p = 0.026), implying that after controlling for firm characteristics, the average level of CSR ratings increases by 1.695 over time after the firm hires a former KLD analyst, compared with its counterpart that does not recruit a former KLD analyst. This increase is economically significant, as it represents an approximately 25 percent (1.695/6.7) improvement in CSR ratings, given that the mean value of pre-hiring CSR ratings is 6.7 for this group with former KLD analysts.12 Overall, the results provide support for the argument that the CSR rating improves subsequent to the recruitment of a former CSR rating agency analyst. This, in turn, is consistent with the notion that the firm recruits a former rating agency analyst to acquire CSR rating–specific knowledge for the purpose of obtaining relatively higher CSR ratings.

 Unreported analyses show that the regression results in Table 11.3 are robust to the use of alternative control groups with one-to-six/one-to-seven matching and without matching. 12

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11.6 Conclusion Managers spend significant resources to increase the level of CSR ratings for their firms. However, little is known about the specific strategies that managers take to enhance CSR ratings. This study documents that the level of CSR ratings is relatively higher for firms hiring a former analyst from the CSR rating agency. This finding has an important implication for future research in CSR, given that most prior studies tend to treat a firm’s CSR rating as an exogenous evaluation of corporate social performance from an independent organization. I take a new perspective that the recruitment of talent from the rating agency can have a positive influence on the rated firm’s CSR rating, suggesting that the firm’s decision to hire a former rating analyst can be an endogenous determinant of its CSR rating. Given potential knowledge spillovers from interfirm labor mobility examined herein, future research might need to consider the role of the relationship between the CSR rating agency and the rated firm in determining corporate social performance. It is important to note several limitations to this study. First, regarding the difference-­in-differences results, the chronological ordering of events is a necessary but not sufficient condition for a cause–effect relationship. Therefore, this study documents an association but does not establish causality. Second, in the main regression analysis, the sample size for the group of firms with a former KLD analyst is modest, with 12 unique firms for 41 firm-year observations from 2004 to 2013. In addition, the sample selection is non-random because it is conditional on the existence of LinkedIn profiles, which are the credible source of information about former KLD analysts’ career transitions over time. Given that the relatively small and non-random sample may constrain the inferences, I call for future research to expand the sample period, potentially with alternative employment databases, which can help enhance the generalizability of my findings. Finally, this study focuses only on employees with experience of working at a specific CSR rating agency named KLD. Alternatively, future researchers can examine former CSR rating analysts with past work experience of formulating different CSR rating data, such as Thomson Reuters’s ASSET4. The empirical implication from this study is that the presence of those analysts with Thomson Reuters employment history is expected to be positively associated with ASSET4’s CSR ratings for their current employer, but not with KLD’s CSR ratings. This finding will further strengthen the argument that employees’ tacit knowledge about the internal generation of CSR ratings can be one of inherent determinants of public firms’ CSR ratings. Funding Acknowledgement  The author gratefully acknowledges financial support from the Social Sciences and Humanities Research Council (SSHRC). The funding reference number is SSHRC 430-2019-0352.

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References Almeida, P., & Kogut, B. (1999). Localization of knowledge and the mobility of engineers in regional networks. Management Science, 45(7), 905–917. Chatterji, A. K., & Toffel, M. W. (2010). How firms respond to being rated. Strategic Management Journal, 31(9), 917–945. Chatterji, A. K., Durand, R., Levine, D. I., & Touboul, S. (2016). Do ratings of firms converge? Implications for managers, investors and strategy researchers. Strategic Management Journal, 37(8), 1597–1614. Cho, S. Y., Lee, C., & Pfeiffer, R. J. (2013). Corporate social responsibility performance and information asymmetry. Journal of Accounting and Public Policy, 32(1), 71–83. De Villiers, C., & Van Staden, C. J. (2011). Where firms choose to disclose voluntary environmental information. Journal of Accounting and Public Policy, 30(6), 504–525. Drucker, P. F. (1998). On the profession of management. Harvard Business School Press. Flammer, C. (2015). Does product market competition foster corporate social responsibility? Evidence from trade liberalization. Strategic Management Journal, 36(10), 1469–1485. Flammer, C. (2018). Competing for government procurement contracts: The role of corporate social responsibility. Strategic Management Journal, 39(5), 1299–1324. Ge, W., & Liu, M. (2015). Corporate social responsibility and the cost of corporate bonds. Journal of Accounting and Public Policy, 34(6), 597–624. Grimpe, C., Kaiser, U., & Sofka, W. (2019). Signaling valuable human capital: Advocacy group work experience and its effect on employee pay in innovative firms. Strategic Management Journal, 40(4), 685–710. Groysberg, B., Lee, L. E., & Nanda, A. (2008). Can they take it with them? The portability of star knowledge workers’ performance. Management Science, 54(7), 1213–1230. Harris, R. J. (1985). A primer of multivariate statistics (2nd ed.). Academic. KLD. (2010). How to use KLD stats & ESG ratings definitions. RiskMetrics. Lee, D. (2020). Corporate social responsibility of U.S.-listed firms headquartered in tax havens. Strategic Management Journal, 41(9), 1547–1571. Levin, R., Klevorick, A., Nelson, R., & Winter, S. (1987). Appropriating the returns from industrial research and development. Brookings Papers on Economic Activity, 3, 783–820. Møen, J. (2005). Is mobility of technical personnel a source of R&D spillovers? Journal of Labor Economics, 23(1), 81–114. MSCI. (2015). MSCI ESG KLD Stats: 1991–2014 data sets. MSCI. Parrotta, P., & Pozzoli, D. (2012). The effect of learning by hiring on productivity. RAND Journal of Economics, 43(1), 167–185. Rao, H., & Drazin, R. (2002). Overcoming resource constraints on product innovation by recruiting talent from rivals: A study of the mutual fund industry, 1986–94. Academy of Management Journal, 45(3), 491–507. Rosenkopf, L., & Almeida, P. (2003). Overcoming local search through alliances and mobility. Management Science, 49(6), 751–766. Singh, J., & Agrawal, A. (2011). Recruiting for ideas: How firms exploit the prior inventions of new hires. Management Science, 57(1), 129–150. Song, J., Almeida, P., & Wu, G. (2003). Learning-by-hiring: When is mobility more likely to facilitate interfirm knowledge transfer? Management Science, 49(4), 351–365. Starr, E., Ganco, M., & Campbell, B. A. (2018). Strategic human capital management in the context of cross-industry and within-industry mobility frictions. Strategic Management Journal, 39(8), 2226–2254. Waddock, S. (2003). Myths and realities of social investing. Organization & Environment, 16(3), 369–380.

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Dongyoung Lee  has been a faculty member at McGill University, Canada since August 2013. His research interests include corporate social responsibility, financial accounting, and international business. His work has been published in premier journals, such as The Accounting Review, Strategic Management Journal, and Journal of Business Ethics

Chapter 12

Organizational Culture and the Moving Target of Corporate Sustainability: An Exploratory Investigation Michael J. Pawlish and Stanley J. Kowalczyk

Abstract  Our study aims to examine which (if any) organizational culture (OC) values are significantly associated with corporate sustainability (CS) performance? To answer that question, we carried out pair-by-pair regression analysis to relate the Corporate Knights’ overall CS scores of 43–58 retail firms in the United States of America to nine OC value scores. To measure CS, we used the Corporate Knights Most Sustainable Corporations Annual List for 2019. The Corporate Knights is a Canadian based media, research, and financial information company that has been ranking companies since 2005. To measure OC, we used the OC value scores from the Massachusetts Institute of Technology (MIT)-Sloan Management Review (SMR)/Glassdoor Culture Study. We found that two of the pair relationships between CS and the nine cultural values were statistically significant. The first relationship was a positive correlation between CS and the OC value “agility sentiment score.” This indicates a direct relationship, indicating that greater agility was associated with higher CS scores. The second relationship was a positive correlation between CS and the OC value “innovation sentiment score.” This indicates a direct relationship, meaning that greater innovation is associated with higher CS scores. We also suggest that the nature of CS measurement systems may be partially responsible for the significance of agility and innovation.

M. J. Pawlish (*) School of Business and Digital Media, Georgian Court University, Lakewood, NJ, USA e-mail: [email protected] S. J. Kowalczyk Lam Family College of Business, San Francisco State University, San Francisco, CA, USA e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Kacanski et al. (eds.), Measuring Sustainability and CSR: From Reporting to Decision-Making, Ethical Economy 64, https://doi.org/10.1007/978-3-031-26959-2_12

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12.1 Introduction A recent article in the Wall Street Journal suggests that Environmental, Social and Governance (ESG) performance is a critical factor in corporate differentiation: Companies have a lot of good reasons to pay close attention to environmental, social and governance factors: attracting talented employees who want to work at a place that is making a positive impact on the world; responding to regulators who are demanding more ESG-­ related transparency; and pleasing major investors who are pushing them to be sustainable for the long haul (Wartzman & Tang, 2021, p. R10).

Moreover, the Biden administration recently declared that the United States would rejoin the Paris Climate Agreement, which represents a shift in policy that influences the corporate sustainability (CS) strategies of firms. At the same time, there is a shift in millennials’ demands toward firms that focus on CS issues. As Henderson (2020) states, “… millennials insist that the firms they work for embrace sustainability and inclusion” (p. 9). If an organization is to successfully deal with these two shifts, we propose that organizational culture (OC) is an important factor to analyze, which is why this study examines the relationship between OC and CS.

12.2 Corporate Sustainability CS emerged from the broader concept of sustainable development. Through the Brundtland report by the World Commission on Environment and Development (WCED, 1987), the idea of sustainable development was presented at the international level. The WCED defined sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (WCED, 1987, p. 43). While this definition is principled in description, it does not provide guidance for managers to operationalize the concept. Building off of the definition of sustainable development, Elkington (1997) coined the idea of the “triple bottom line” to assist managers and employees in operationalizing the concept. The idea behind the “triple bottom line” was to not only look at the financial bottom line of the company, but also to have a broader outlook on the impact of the firm on an environmental, social, and economic level. In the twenty plus years since Elkington (1997) introduced the “triple bottom line,” numerous sustainable business and accounting concepts have emerged. In a follow up article Elkington (2018) argued that even though progress has been made towards the “triple bottom line,” the concept was understood as a balancing act. He stated, “It (the triple bottom line) was supposed to provoke deeper thinking about capitalism and its future, but many early adopters understood the concept as a balancing act, adopting a trade-off mentality” (p. 3). Over the same period, numerous definitions of CS have been proliferated in the academic arena. While the focus of this paper is not to define CS, a detailed examination of the definition can be found

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in the work of Meuer et  al. (2020), who wanted to clarify the concept of CS by reviewing 33 definitions of the term of which Elkington’s (1997) is the first. In the period from when Elkington (1997) coined the idea of the “triple bottom line” until the present, the concept of CS has constantly been debated in the academic arena. While it is critical and important to clarify and define CS, practitioners are facing a pressing need to implement CS in the present moment. In terms of practical implication, the United Nations Global Compact (2015) suggested the following definition, “Corporate sustainability is a company’s delivery of long-term value in financial, environmental, social and ethical terms” (p.  9). However, it appears that companies focused more on technical issues concerning the environment at the start of the twenty-first century. It has been much easier to address environmental issues like water or electricity usage than social issues after all. As Hawken et  al. (1999) foresaw, “social issues are human and messy” (p.  319). Therefore, practitioners have generally addressed environmental aspects first. Over the last twenty years, firms have been continually building on the more challenging components of measuring social issues. CS has also been confused with the concept of corporate social responsibility. Both concepts have a rich research stream; corporate social responsibility research emerged in the 1950s, while CS developed in the 1980s (Bansal & Song, 2017). Montiel (2008) points out that social issues have typically been addressed in corporate social responsibility research and environmental issues addressed in environmental management research, but CS has “blurred the research boundaries” (p. 246). Montiel (2008) also states that CS and corporate social responsibility, while having different pasts, are merging to have a common future focusing on balancing economic, social, and environmental responsibilities. While Bansal and Song (2017) agree that the convergence of CS and corporate social responsibility has blurred their distinctions, they also highlighted a need to expand the understanding between the two fields of study.

12.3 Organizational Culture CS and OC share a similarity in the sense that there are numerous definitions for both terms. In the case of OC, it could be argued that some of the definitions may conflict. This may be due to the emergence of OC from culture research with origins in anthropology, psychology, and sociology. At the same time, researchers studied OC on multiple levels of analysis: individual, group, organization, and society. For the purposes of our study, we agree with the definition of OC from Schein (1985): Organizational culture is the pattern of shared basic assumptions—invented, discovered, or developed by a given group as it learns to cope with its problems of external adaptation and internal integration—that has worked well enough to be considered valid and, therefore, to be taught to new members as the correct way to perceive, think, and feel in relation to those problems (p. 9).

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The debate for consensus continues into what Chatman and O’Reilly (2016) state as a period of “stagnation” while scholars and practitioners seek a shared definition. Despite the disagreements on the definition of OC, there seems to be a consensus on shared values and norms. While there are some areas of agreement on the definition of OC, there is even less agreement on the measurement of OC (O’Reilly et  al., 1991). However, there are four main instruments used to measure OC as follows: (1) the Denison Organizational Culture Survey, (2) the Competing Values Framework, (3) the Organizational Culture Inventory, and (4) the Organizational Culture Profile. The Denison Organizational Culture Survey is a popular consulting tool that measures OC and its effectiveness. The Competing Values Framework was developed out of academia and explores four different types of OC: hierarchy, clan, ad-­ hocracy, and market. The Organizational Culture Inventory is the most widely used tool to measure OC in the world and assesses 12 thinking styles. The Organizational Culture Profile was developed from the work of Schein and “… focuses specifically on the norms and values that might characterize a group or organization’s culture” (Chatman & O’Reilly, 2016, p. 211). The Organizational Culture Profile was developed by O’Reilly et al. (1991) to measure person-organizational fit and obtain a cultural profile of organizations. The Organizational Culture Profile was found to be valid and reliable (Chatman & O’Reilly, 2016). Sull et al. (2019) used the Organizational Culture Profile to develop the Massachusetts Institute of Technology (MIT)-Sloan Management Review (SMR)/Glassdoor Study (2019) used in this study.

12.4 The Link Between Corporate Sustainability and Organizational Culture The emergence of CS since the beginning of the twenty-first century, combined with the continued interest in OC, has contributed to a relatively new research stream. As Howard-Grenville et al. (2014) noted in their systematic review of the literature on CS and OC, there is limited but growing theoretical and empirical research on this topic. Linnenluecke and Griffiths (2010) examined the theoretical relationship between CS and OC by using the Competing Values Framework to study the make­up of sustainability-oriented firms. They further examined the proposition that firms could become more sustainable by engaging in cultural change. Linnenluecke and Griffiths (2010) highlight two important findings: different subcultures within the firm can hold varying opinions on CS, and these same subcultures can present barriers and limitations to culture change. Baumgartner (2009) argued through a case study that CS needs to be embedded in the OC to be effective. In his study of a mining company, Baumgartner (2009) implemented the model of Schein, which resulted in four CS strategies: introverted, extroverted, conservative, and visionary. The findings from his study suggest that upper management needs “… to value the importance of sustainable development”

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(Baumgartner, 2009, p. 111). To fully integrate CS into a firm’s OC, there needs to be a top-down approach by upper management along with a bottom-up approach by employees and managers. In a more recent publication, Kantabutra and Ketprapakorn (2020) proposed a new theory of CS which “… asserts that the sustainability OC comprising sustainability vision and values leads to emotional commitment from organizational members to attain the vision” (p. 19). This statement represents the need for a top-down management approach to build CS into the OC of a firm. However, there is still limited empirical research on the link between OC and CS. Bakhsh Magsi et al. (2018) conducted one of the few empirical studies utilizing Denison’s four OC measurements. Based on a survey of 314 manufacturing firms, they found that the OC dimensions of adaptability, mission, and consistency positively affected environmental performance, but not the OC dimension of involvement. The respondents were asked to self-evaluate both the OC of their own firms and to self-evaluate the environmental performance of their firms. Unlike their study, our research utilizes external measures of OC as well as external measures of CS performance.

12.5 Method We carried out pair-by-pair regression analysis to relate the Corporate Knights’ overall corporate sustainability (CS) scores of 43–58 retail firms in the United States of America to nine OC value scores. To measure CS, we used their Most Sustainable Corporations Annual List for 2019. The Corporate Knights is a Canadian based media, research, and financial information company that has been ranking companies since 2005. Their CS score was based on publicly disclosed data. The Corporate Knights had an aggregated CS score for their annual ranking. The methodology for their aggregated CS score for the retail industry was based on 15 key performance indicators. Those indicators were: clean revenue (50%), CEO average worker pay (10%), employee turnover (9%), lost time injury rate (5%), women on boards (5%), women in senior executive management (5%), sustainability pay link (5%), percent tax paid (3%), supplier sustainability score (2.5%), innovation capacity (2%), pension fund status (2%), greenhouse gas productivity (>1%), energy productivity (>1%), water productivity (>1%) and waste productivity (>1%). The approximate weighting is shown next to each of the indicators. To measure OC, we used the OC value scores from the Massachusetts Institute of Technology (MIT)-Sloan Management Review (SMR)/Glassdoor Culture Study. The Glassdoor Culture Study sample of the retail industry examined 300,256 employee reviews. They used a human-machine approach to analyze text responses utilizing artificial intelligence that made use of natural language processing. This approach resulted in developing nine OC value scores for each firm. See Table  12.1 for the definitions by Sull et  al. (2019) of the nine cultural values.

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Table 12.1  The big 9 cultural values Value Agility

Definition Employees can respond quickly and effectively to changes in the marketplace and seize new opportunities.

Also known as Flexible Nimble Fast moving Collaboration Employees work well together within their team and across Teamwork different parts of the organization. One company Join forces Customer Employees put customers at the center of everything they do, Customer focus listening to them and prioritizing their needs. Deliver for our clients Customer-driven Diversity Company promotes a diverse and inclusive workplace where Inclusion no one is disadvantaged because of their gender, race, Everyone is ethnicity, sexual orientation, religion, or nationality. welcome Celebrate difference Execution Employees are empowered to act, have the resources they Operational need, adhere to process discipline, and are held accountable excellence for results. Projects managed well Take ownership Innovation Company pioneers novel products, services, technologies, or Cutting edge ways of working. Leading change Advanced tech Integrity Employees consistently act in an honest and ethical manner. Do the right thing Be ethical Play by the rules Performance Company rewards results through compensation, informal Meritocratic recognition, and promotions, and deals effectively with Recognize underperforming employees. achievement Results-driven Respect Employees demonstrate consideration and courtesy for others, Treat with and treat each other with dignity. dignity Courtesy Appreciation for each other The big 9 cultural values description provided by: www.sloanreview.mit.edu/culture500

12.6 Results For our analysis, a firm’s CS score, as determined by the Corporate Knights was used to complete a regression analysis with each of the nine values of OC. Pair-by-­ pair regression analysis was performed to determine the relationship between the CS score and a given cultural value. Because there was one CS score and nine cultural values, nine pairs were analyzed.

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Fig. 12.1  The relationship of agility to corporate sustainability

Fig. 12.2  The relationship of innovation to corporate sustainability

Two of the pair relationships between CS and the nine cultural values were statistically significant. The first significant relationship below the p